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

FORM 10-K

(Mark One)

(X)	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended February 1, 2004

OR

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

For the transition period from _____________ to ___________

Commission File Number 0-20269

DUCKWALL-ALCO STORES, INC.

(Exact name of registrant as specified in its charter)

Kansas		48-0201080
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
401 Cottage Street Abilene, Kansas		67410-2832
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number including area code: (785) 263-3350

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $.0001 per share (Title of Class)

Indicate by check mark 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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]

The aggregate market value of the 2,755,056 shares of Common Stock, par value $.0001 per share, of the registrant held by non-affiliates of the registrant is $34,438,200 on August 4, 2003, based on a closing sale price of $12.50. As of April 9, 2004, there were 4,317,619 shares of Common Stock outstanding.

Documents incorporated by reference: portions of the Registrant’s Proxy Statement for the 2004 Annual Meeting of Stockholders are incorporated by reference in Part III hereof.

PART I

ITEM 1. BUSINESS

History

Duckwall-ALCO Stores, Inc., (the “Company” or “Registrant”), was founded as a general merchandising operation in 1901 in Abilene, Kansas by A. L. Duckwall. From its founding until 1968, the Company conducted its retail operations as small variety or “dime” stores. In 1968, the Company followed an emerging trend to discount retailing when it opened its first ALCO discount store. In 1991, the Company adopted its current business strategy that focuses on under-served markets that have no direct competition from another full-line discount retailer. This strategy includes opening either an ALCO discount store or a Duckwall variety store, depending upon the market size. As of April 30, 2004, the Company operates 265 retail stores located in the central United States, consisting of 185 ALCO retail discount stores and 80 Duckwall variety stores.

The Company was incorporated on July 2, 1915 under the laws of Kansas. The Company’s executive offices are located at 401 Cottage Street, Abilene, Kansas 67410-2832, and its telephone number is (785) 263-3350.

General

The Company is a regional retailer operating 265 stores in 21 states in the central United States. The Company’s strategy is to target smaller markets not served by other regional or national full-line retail discount chains and to provide the most convenient access to retail shopping within each market. The Company’s ALCO discount stores offer a full 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 variety stores offer a more limited selection of similar merchandise.

Of the Company’s 185 ALCO discount stores, 151 stores are located in communities that do not have another full-line discounter. The Company intends to continue its strategy of opening ALCO stores in markets that do not have other full-line discount retailers and where the opening of an ALCO store is likely to be preemptive to the entry by other full-line discount competitors in the market. The ALCO discount stores account for 92% of the Company’s net sales. While the current ALCO stores average 20,800 square feet of selling space, the Company’s store expansion program is primarily directed toward stores with a design prototype of approximately 18,000 square feet of selling space (“Class 18 Stores”), which, based on the Company’s experience, has been a design that maximizes return on investment for newly constructed stores.

The Company’s 80 Duckwall variety stores are primarily located in communities of less than 2,500 residents and are designed to act as the primary convenience retailer in these smaller communities. These stores, which account for the remaining 8% of the Company’s net sales, average approximately 5,400 square feet of selling space and offer approximately 12,000 items. Operating Duckwall stores offer the Company the opportunity to serve the needs of a community that would not support a full-line retail discount store with a reduced investment per store.

All of the Company’s discount and variety stores are serviced by the Company’s 352,000 square foot distribution center in Abilene, Kansas.

Business Strategy

The Company’s focus over the last three fiscal years has been to implement new merchandising and marketing initiatives in an effort to increase customer traffic and same-store sales. One of the initiatives was a remodel program. During fiscal 2004, the Company remodeled 23 stores. During each of fiscal 2003 and fiscal 2002, the Company remodeled 32 stores. These stores feature an improved merchandise mix, with greater emphasis on everyday low values that are highlighted through a new and more dominant sign program. The Company plans to continue its remodeling program next year by remodeling approximately 23 stores. The Company has also opened a total of 17 new ALCO stores during the last three fiscal years that incorporate the enhanced merchandising concepts of the remodeled stores, bringing the total number of stores with this new format to 104 at the end of fiscal 2004. The Company plans to open approximately seven ALCO stores in fiscal 2005. The Company continues to close non-performing stores in competitive markets, which slows the growth of overall store count. The Company intends to focus on executing a business strategy that includes the following key components:

Markets: The Company intends to open ALCO stores in towns with populations of typically less than 5,000 that are in trade areas with populations of less than 16,000 where: (1) there is no direct competition from national or regional full-

line discount retailers; (2) economic and demographic criteria indicate the market is able to commercially support a discount retailer; and (3) the opening of an ALCO store would significantly reduce the likelihood of the entry into such market by another full-line discount retailer. This key component of the Company’s strategy has guided the Company in both its opening of new stores and in its closing of existing stores. Since 1991, the Company has opened 136 ALCO discount stores (with an approximate average size of 18,800 square feet of selling space) and 87 Duckwall variety stores. Except for ten stores, all of these stores were opened in a primary market in which there was no direct competition from a national or regional full-line discount retailer.

Market Selection: The Company has a detailed process that it uses to analyze under-served markets which includes examining factors such as distance from competition, trade area, demographics, retail sales levels, existence and stability of major employers, location of county government, disposable income, and distance from the Company’s distribution center. Markets that are determined to be sizable enough to support an ALCO or a Duckwall store, and that have no direct competition from another full-line discount retailer, are examined closely and eventually selected or passed over by the Company’s experienced management team.

Store Expansion: The Company’s expansion program is designed primarily around the prototype Class 18 Store. This prototype details for each new store plans for shelf space, merchandise presentation, store items to be offered, parking, storage, as well as other store design considerations. The 18,000 square feet of selling space is large enough to permit a full line of the Company’s merchandise, while minimizing capital expenditures, labor costs and general overhead costs. The Company will also consider opportunities in acceptable markets to open ALCO stores in available space in buildings already constructed. The expansion strategy for its Duckwall variety stores is based on opportunities in smaller communities where there is a need and where existing premises are available for lease at a relatively low cost, resulting in limited downside exposure. Although it has closed 21 Duckwall stores within the last five years, the Company continues to look for expansion opportunities in its target market areas.

Technology: The Company is continually improving its management information technologies to support the operation of the Company. In fiscal 1999, the Company implemented a new system for merchandise administration and distribution. In fiscal 2000, the Company completed the roll-out of new point-of-sale (“POS”) store software that has extended the life and capabilities of its POS hardware. In conjunction with this roll-out of POS software, the stores received radio frequency hand held devices to allow for additional operating efficiencies. The Company also devoted resources to identify and fix or replace software and hardware that was not year 2000 compliant. During the last three fiscal years, the Company has continued to devote resources to development of systems that have improved information available to management and improved specific operational efficiencies. The Company also selected a warehouse management software package that is expected to go into production in fiscal 2005.

During fiscal 2005, the Company plans to begin the process of evaluating its options to replace and upgrade its store POS hardware, which varies in age from 7 to over 10 years old, and related software. The objective of the upgrade will be to take advantage of newer technology available today and re-engineer the stores to eliminate in-efficiencies caused by the older technology. This will be a significant undertaking and the total cost of the changeover could be several million dollars, and could take several years to complete. The Company also plans to begin the process of replacing its outdated payroll system.

Advertising and Promotion: The Company utilizes full-color photography advertising circulars of 16 to 24 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail. During fiscal 2004, these circulars were distributed 34 times in ALCO markets. In its Duckwall markets, the Company initiated, in fiscal 2004, a full-color, 4 page insert program. Distributed through insertion in the local papers, this program has been deemed a success. The Company’s marketing program is designed to create awareness and recognition of its competitive pricing on a comprehensive merchandise selection for the whole family. During fiscal 2005, the Company will distribute approximately 34 circulars in ALCO markets, and 12 in the Duckwall markets.

Store Environment: The Company’s stores are open, clean, bright and offer a pleasant atmosphere with disciplined product presentation, attractive displays and efficient check-out procedures. The Company endeavors to staff its stores with courteous, highly motivated, knowledgeable store associates in order to provide a convenient, friendly and enjoyable shopping experience.

Store Development

The Company expects to open approximately 7 ALCO stores during fiscal year 2005, and approximately 10 ALCO stores during each of the fiscal years 2006 and 2007. The Company’s strategy regarding store development is to increase sales and

profitability at existing stores by continually refining the merchandising mix and improving operating efficiencies, and through new store openings in the Company’s targeted base of under-served markets in the central United States. Since fiscal 1995, the Company has opened a total of 104 ALCO stores with an average selling area of approximately 19,000 square feet, and 67 Duckwall stores. The following table summarizes the Company’s growth during the past three fiscal years:

													2005
	2002				2003				2004				(As of April 30, 2004)
	ALCO		Duckwall		ALCO		Duckwall		ALCO		Duckwall		ALCO		Duckwall
Stores Opened	4		0		5		0		8		0		1		0
Stores Closed	2		5		2		3		2		6		0		0
Net New Stores	2		(5)		3		(3)		6		(6)		1		0

Currently, the Company owns 12 ALCO and one Duckwall location, and leases 173 ALCO and 79 Duckwall store locations. The Company’s present intention is to lease all new Duckwall stores. The Company may own some of the ALCO locations, but will generally try to lease these store locations.

As discussed above, before entering a new market with an ALCO or Duckwall store, the Company analyzes and screens available competitive, market, and demographic data to evaluate the suitability and attractiveness of the potential market. The screening process also involves a visit by officers of the Company to more subjectively evaluate the potential new site. The Company is in the site selection and/or procurement process in approximately 20 of those markets, each of which has been approved by the Company for a new store location.

The estimated investment to build and open a new Class 18 ALCO Store is approximately $1.375 million for the land, building, equipment, and inventory. If the building is leased, the initial investment is approximately $625,000.

Store Environment and Merchandising

The Company manages its stores to attractively and conveniently display a full line of merchandise within the confines of the stores’ available square footage. Corporate merchandising direction is provided to each ALCO and Duckwall store to ensure a consistent company-wide store presentation. To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories driven by the Company’s customer profile: 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 ALCO will maintain convenient (but limited) assortments, focusing on key items that are in keeping with customers’ expectations for a discount 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 discount 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.

Purchasing

Procurement and merchandising of products is directed by the Company’s Senior Vice President - Merchandise, who reports to the Company’s President. The Senior Vice President - Merchandise is supported by a staff of three Vice President - Divisional Merchandise Managers who are each responsible for specific product categories. The Company employs 20 merchandise buyers and three assistant buyers who each report to a Vice President - Divisional Merchandise Manager. Buyers are assisted by a management information system that provides them with current price and volume information by SKU, thus allowing them to react quickly with buying and pricing adjustments dictated by customer buying patterns.

The Company purchases its merchandise from approximately 2,000 suppliers. The Company generally does not utilize long-term supply contracts. No single supplier accounted for more than 5% of the Company’s total purchases in fiscal 2004 and competing brand name and private label products are available from other suppliers at competitive prices. The Company believes that its relationships with its suppliers are good and that the loss of any one or more of its suppliers would not have a material adverse effect on the Company.

Pricing

Merchandise pricing is done at the corporate level and is essentially the same for all of the ALCO stores, regardless of the level of local competition. This pricing strategy, with its promotional activities, is designed to bring consistent value to the customer. In fiscal 2005, promotions on various items will be offered approximately 34 times through advertising circulars. Even though the same general pricing and advertising activities are carried out for all ALCO stores, the impact of such activities is significantly different depending upon the level of competition in the market.

Distribution and Transportation

The Company operates a 352,000 square foot distribution center in Abilene, Kansas, from which it services each of the 185 ALCO discount stores and 80 Duckwall variety stores. This distribution center is responsible for distributing approximately 80% of the Company’s merchandise, with the balance being delivered directly to the Company’s stores by its vendors. This distribution center ships to each of the Company’s ALCO stores once a week, primarily through irregular route common carriers. The Company also utilizes its wholly owned subsidiary, SPD Truck Line, Inc. (the “Subsidiary”) for delivery to the stores. The distribution center is fully integrated into the Company’s management information system, allowing the Company to utilize such cost cutting efficiencies as perpetual inventories, safety programs, and employee productivity software.

The Subsidiary acts as a contract carrier for the Company in transporting goods to and from its stores. The Subsidiary uses five tractors and leases 23 trailers for such deliveries.

Management Information Systems

The Company has committed significant resources to the purchase and application of available computer hardware and software to its discount retailing operations with the intent to lower costs, improve customer service and enhance general business planning.

In general, 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 discount stores have POS computer terminals that record certain sales data in a format that can be transmitted nightly to the Company’s data processing facility where it is used to produce daily and weekly management reports. In fiscal 1999, the Company implemented a new system for merchandise administration and distribution. In fiscal 2000, the Company completed the roll-out of new POS store software that has extended the life and capabilities of its POS hardware. In conjunction with this roll-out of POS software, the stores received radio frequency hand held devices to allow for additional operating efficiencies. During the last three fiscal years, the Company has continued to devote resources to development of systems that have improved information available to management and improved specific operational efficiencies. The Company also selected a warehouse management software package that is expected to go into production in fiscal 2005.

Approximately 1,500 of the Company’s merchandise suppliers currently participate in the Company’s electronic data interchange (“EDI”) system, which makes it possible for the Company to place purchase orders electronically. A number of these suppliers are able to utilize additional EDI functions, including transmitting invoices and advance shipment notices to the Company and receiving sales history from the Company.

Store Locations

As of April 30, 2004, the Company operated 185 ALCO stores in 21 states located in smaller communities in the central United States. Of the ALCO stores, 12 are owned by the Company and 173 are leased by the Company. The ALCO stores average approximately 20,800 square feet of selling space, with an additional 4,900 square feet utilized for merchandise processing, temporary storage and administration. The Company also operates 80 Duckwall stores in 10 states, one of which is owned by the Company, and 79 of which are leased by the Company. The geographic distribution of the Company’s stores is as follows:

 

Duckwall Stores (80)
Arkansas (1)	Colorado (6)	Iowa (6)	Kansas (34)	Nebraska (8)
New Mexico (1)	North Dakota (1)	Oklahoma (8)	South Dakota (3)	Texas (12)
ALCO Stores (185)
Arizona (9)	Arkansas (5)	Colorado (13)	Idaho (3)	Illinois (8)	Indiana (13)
Iowa (8)	Kansas (25)	Minnesota (7)	Missouri (5)	Montana (1)	Nebraska (17)
New Mexico (9)	North Dakota (7)	Ohio (6)	Oklahoma (8)	South Dakota (9)	Texas (23)
Utah (5)	Wisconsin (1)	Wyoming (3)

Competition

While the discount retail business in general is highly competitive, the Company’s business strategy is to locate its ALCO discount stores in smaller markets where there is no direct competition with larger national or regional full-line discount chains, and where it is believed no such competition is likely to develop. Accordingly, the Company’s primary method of competing is to offer its customers a conveniently located store with a wide range of merchandise at discount prices in a primary trade area population under 16,000 that does not have a large national or regional full-line discount store. The Company believes that trade area size is a significant deterrent to larger national and regional full-line discount chains. Duckwall variety stores are located in very small markets, and like the ALCO stores, emphasize the convenience of location to the primary customer base.

In the discount retail business in general, price, merchandise selection, merchandise quality, advertising and customer service are all important aspects of competing. The Company encounters direct competition with national full-line discount stores in 25 of its ALCO markets, and another 8 ALCO stores are in direct competition with regional full-line discount stores. The competing regional and national full-line discount retailers are generally larger than the Company and the stores of such competitors in the Company’s markets are substantially larger, have a somewhat wider selection of merchandise and are very price competitive in some lines of merchandise. Where there are no national or regional full-line discount retail stores directly competing with the Company’s ALCO stores, the Company’s customers nevertheless shop at retail discount stores and other retailers located in regional trade centers, and to that extent the Company competes with such discount stores and retailers. The Company also competes for retail sales with mail order companies, specialty retailers, mass merchandisers, dollar stores, manufacturer’s outlets, and the internet. In the 136 markets in which the Company operates a Class 18 Store, there is no direct competition from a national or regional full-line discount retailer. The Company competes with dollar stores in approximately three-fourths of its ALCO stores and approximately one-third of its Duckwall stores.

Executive Officers of the Company

The following table sets forth the names, ages, positions and certain other information regarding the executive officers of the Company as of April 30, 2004.

Name	Age		Position
Glen L. Shank	59		Chairman of the Board and President
James E. Schoenbeck	60		Senior Vice President - Operations and Advertising
James R. Fennema	53		Senior Vice President - Merchandise
Richard A. Mansfield	48		Vice President - Finance and Treasurer
Tom L. Canfield, Jr.	50		Vice President - Distribution and Administration

Except as set forth below, all of the executive officers have been associated with the Company in their present position or other capacity for more than the past five years. There are no family relationships among the executive officers of the Company.

Glen L. Shank has served as President of the Company since June 1988 and as Chairman of the Board since May 1991. Between 1982 and 1988, Mr. Shank served as Vice President of Merchandising of the Company. Prior to 1982, Mr. Shank served as a Buyer and as a Merchandise Manager for the Company. Mr. Shank has approximately 37 years of experience in the retail industry.

James E. Schoenbeck has served as Vice President of Store Operations and Advertising since 1988. From 1979 to 1988, Mr. Schoenbeck served as the Vice President of Administration. Mr. Schoenbeck has approximately 30 years of experience in the retail industry.

James R. Fennema has served as Vice President - Merchandise of the Company since March 1993. For the four years prior to that he served as Vice President and a divisional merchandise manager with Caldor, Inc., a chain of regional discount stores in New England and the mid-Atlantic states of the United States. For more than the four years prior to that he served as a divisional merchandise manager of Fishers Big Wheel, a regional discount store chain. Mr. Fennema has approximately 31 years of experience in the retail industry.

Richard A. Mansfield has served as Vice President - Finance and Treasurer of the Company since May 1997. For the two years prior to that he served as Chief Financial Officer of Country General Stores, Inc., a regional chain of specialty farm and ranch stores located in the Midwest. For the three years prior to that he served as Chief Financial Officer of American Laminates, Inc. and Relco, Inc. Mr. Mansfield has approximately 23 years of experience in the retail industry.

Tom L. Canfield, Jr. has served as Vice President - Distribution and Administration since 1992. From 1973 to 1992, Mr. Canfield served in various capacities with the Company. Mr. Canfield has approximately 31 years of experience in the retail industry.

Employees

As of April 30, 2004, the Company employed approximately 5,300 people. Of these employees, approximately 500 were employed in the general office and distribution center in Abilene, 4,200 in the ALCO stores and 600 in the Duckwall stores. Additional employees are hired on a seasonal basis, most of whom are sales personnel. There is no collective bargaining agent for any of the Company’s employees. The Company considers its relations with its employees to be excellent.

ITEM 2.   PROPERTIES.

The Company owns facilities in Abilene, Kansas that consist of a general office (approximately 35,000 square feet), the Distribution Center (approximately 352,000 square feet) and additional warehouse space adjacent to the general office.

Twelve of the ALCO stores and one of the Duckwall stores operate in buildings owned by the Company. The remainder of the stores operate in properties leased by the Company. Such ALCO leases account for approximately 4,425,000 square feet of lease space, which expire as follows: approximately 505,417 square feet (11.4%) expire between April 30, 2004 and January 30, 2005; approximately 419,952 square feet (9.5%) expire between January 31, 2005 and January 29, 2006; and approximately 447,410 square feet (10.1%) expire between January 30, 2006 and January 28, 2007. The remainder of the leases expire through 2021. All Duckwall store leases have terms remaining of three years or less. The majority of the leases that are about to expire have renewal options with lease terms that are the same as the existing lease.

ITEM 3.   LEGAL PROCEEDINGS.

Other than routine litigation from time to time in the ordinary course of business, the Company is not a party to any material litigation.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of the stockholders of the Company during the fourth quarter of the fiscal year ended February 1, 2004.

PART II

ITEM 5.   MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER                  MATTERS.

The Common Stock of the Company is quoted on the NASDAQ National Market tier of The NASDAQ Stock Market under the symbol “DUCK.” The following table sets forth the range of high and low bid information for the Company’s Common Stock for each quarter of fiscal 2004 and 2003.

		High		Low
Fiscal 2004	First quarter	$10.25		$  9.09
	Second quarter	13.56		9.75
	Third quarter	15.00		12.41
	Fourth quarter	15.68		14.05
Fiscal 2003	First quarter	$15.50		$10.55
	Second quarter	15.51		11.98
	Third quarter	13.35		9.15
	Fourth quarter	11.99		9.40

As of April 9, 2003, there were approximately 1,272 holders of record of the Common Stock of the Company. The Company has not paid cash dividends on its Common Stock during the last five fiscal years. The terms of the Loan and Security Agreement, dated as of April 15, 2002, between the Company and Fleet Retail Finance Inc. allow for the payment of dividends unless certain loan covenants are triggered, which are not expected to occur during fiscal 2005.

Equity Compensation Plan Information
Plan Category	Number of securities to be issued upon exercise of outstanding options, warrants and rights		Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans
Equity compensation plans approved
by stockholders:
1993 Incentive Stock Option Plan	281,971		$8.94		0
2003 Incentive Stock Option Plan	0		$0.00		500,000
Equity compensation plans not
approved by stockholders	0		$0.00		0

ITEM 6. SELECTED FINANCIAL DATA.

SELECTED CONSOLIDATED FINANCIAL DATA (dollars in thousands, except per share and store data)

The selected consolidated financial data presented below for, and as of the end of, each of the last five fiscal years under the captions Statements of Operations Data and Balance Sheet Data have been derived from the audited consolidated financial statements of the Company. This data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Item 7) and the consolidated financial statements, related notes, and other financial information included herein (Item 8).

	Fiscal Year Ended
	February 1, 2004		February 2, 2003		February 3, 2002		January 28, 2001		January 30, 2000
Statements of Operations Data
Net sales	$433,270		$403,471		$400,283		$379,711		$370,262
Cost of sales	289,702		268,892		269,293		254,693		245,782
Gross margin	143,568		134,579		130,990		125,018		124,480
Selling, general and administrative expenses (including
provision for asset impairment and store closure)	125,726		117,333		113,792		108,369		103,971
Depreciation and amortization	7,284		6,825		6,265		6,073		6,230
Income from continuing operations	10,558		10,421		10,933		10,576		14,279
Interest expense	1,386		1,609		2,778		3,254		3,672
Earnings from continuing operations before income taxes,
discontinued operations and cumulative effect of
accounting change	9,172		8,812		8,155		7,322		10,607
Income tax expense	2,769		3,235		3,105		2,767		4,030
Earnings from continuing operations before discontinued
operations and cumulative effect of accounting change	6,403		5,577		5,050		4,555		6,577
Income (loss) from discontinued operations, net of income tax (1)	110		(223)		(296)		124		(19)
Cumulative effect of accounting change, net of income
tax benefit of $111 in 2001 (2)	0		0		0		(173)		0
Net earnings	$6,513		$5,354		$4,754		$4,506		$6,558
Per Share Information:
Earnings per share - basic:
Earnings before discontinued operations and
cumulative effect of accounting change	$1.50		$1.32		$1.20		$1.02		$1.32
Discontinued operations	0.03		(0.06)		(0.07)		0.02		0.00
Cumulative effect of accounting change	0.00		0.00		0.00		(0.04)		0.00
Net earnings	$1.53		$1.26		$1.13		$1.00		$1.32
Earnings per share - diluted:
Earnings before discontinued operations and
cumulative effect of accounting change	$1.47		$1.28		$1.20		$1.01		$1.32
Discontinued operations	0.03		(0.05)		(1.07)		0.03		0.00
Cumulative effect of accounting change	0.00		0.00		0.00		(0.04)		0.00
Net earnings	$1.50		$1.23		$1.13		$1.00		$1.32
Weighted average shares outstanding:
Basic	4,243,441		4,235,911		4,191,809		4,482,153		4,967,332
Diluted	4,343,381		4,355,653		4,207,560		4,501,106		4,967,332
Operating Data
Stores open at year-end	264		264		264		267		269
Stores in non-competitive markets at year-end (3)	230		229		221		222		220
Percentage of total stores in
non-competitive markets (3)	87.12%		86.74%		83.71%		83.15%		81.78%
Net sales of stores in non-competitive markets (3)	$363,634		$334,811		$317,585		$299,713		$281,263
Percentage of net sales from stores in
non-competitive markets (3)	83.99%		81.53%		77.12%		76.70%		73.90%
Comparable store sales for all stores (4)	0.98%		-0.05%		2.90%		0.40%		-0.10%
Comparable store sales for stores in
non-competitive markets (3)(4)	2.09%		0.09%		2.94%		1.80%		1.80%
Balance Sheet Data
Total assets	$167,493		$169,900		$165,286		$170,094		$178,179
Total debt (includes capital lease
obligation and current maturities)	10,876		24,611		26,437		35,153		41,761
Stockholders' equity	109,193		102,110		95,590		92,506		90,218

(1)

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 as discontinued operations of certain prior year revenue and expense activity related to eight and five stores closed during fiscal years 2004 and 2003, respectively.

(2)

Effective October 30, 2000, the Company, in response to the Securities and Exchange Commission Staff Accounting Bulletin No. 101 (SAB 101), changed its method of accounting for layaway sales, retroactive to the beginning of the year. Previously, the Company recognized revenue on the entire amount of layaway sales at the time merchandise was placed on layaway. Under the new method, revenue on layaway sales are recognized upon delivery of the merchandise to the customer.

 

(3)

“Non-competitive” markets refer to those markets where there is not a national or regional full-line discount store located in the primary market served by the Company. The Company’s stores in such non-competitive markets nevertheless face competition from various sources. See Item 1 “Business-Competition”.

(4)

Percentages, as adjusted to a comparable 52 week year, reflect the increase or decrease based upon a comparison of the applicable fiscal year with the immediately preceding fiscal year for stores open during the entirety of both years.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

Operations. The Company is a regional discount retailer operating in 21 states in the central United States, with two business segments, consisting of:

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the ALCO Stores segment. The Company operates 165 ALCO Stores which offer a wide variety of general merchandise and a limited variety of food products and account for 92% of the Company’s fiscal 2004 sales.

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the Duckwall Stores segment. The Company operates 80 Duckwall Stores which offer a more limited general merchandise selection, but serve the needs of a community that is not large enough to support a full-line retail discount store, and account for 8% of the Company’s fiscal 2004 sales.

The Company’s fiscal year ends on the Sunday closest to January 31. Fiscal 2004 and fiscal 2003 consisted of 52 weeks, and fiscal 2002 consisted of 53 weeks.

As used below, the term “competitive market” refers to any market in which there is one or more national or regional full-line discount stores located in the primary market served by the Company. The term “non-competitive market” refers to any market in which there is no national or regional full-line discount store located in the primary market served by the Company. Even in a non-competitive market, the Company faces competition from a variety of sources. See Item 1 “Business-Competition”.

The Retail Industry. The Company’s business is generally a highly competitive business. However, to reduce the competition and improve the company’s performance, the Company’s overall business strategy involves identifying, and opening stores in, under-served markets that currently have no direct competition from another larger national or regional full-line discount retailer and providing the most convenient access to retail shopping within those markets. A key aspect of this strategy includes placing the Company’s stores in markets where the Company believes no such competition is likely to develop. This strategy does not eliminate the competition for the Company’s stores as the Company’s customers still shop at retail discount stores and other retailers located in regional trade centers. The Company also competes for retail sales with mail order companies, specialty retailers, mass merchandisers, dollar stores, manufacturer’s outlets, and the internet.

Key Items in Fiscal 2004. Significant financial items during fiscal 2004 were:

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Net sales increased 7.4% to $433.3 million and net earnings increased 22%. Net earnings included a one-time tax-related benefit of approximately $618,000.

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Outstanding debt was reduced by $13 million. Year end equity-to-total-capitalization ratio improved to 91% from 81% at the end of fiscal 2003.

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Book value per share increased 5.9% to $25.39 per share.

Company Performance Measures. The Company measures itself against a number of financial metrics to assess its performance. The following are the most frequently discussed metrics, and are discussed in more detail under the heading “Fiscal 2004 Compared to Fiscal 2003.”

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Same store sales growth is a measure which indicates whether existing stores are maintaining their market share. We define same stores as those stores that were open as of the first day of the prior fiscal year. Same store sales of the ALCO stores in non-competitive markets increased 1.7%. Sales in the Duckwall division were relatively strong, with a 5.6% same store increase.

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Gross margin percentage is a key measure of the Company’s ability to maximize profit on the purchase and subsequent sale of merchandise, while minimizing promotional and clearance markdowns, shrinkage, damage, and returns. Gross margin percentage is defined as sales less cost of sales, expressed as a percentage of sales. Gross margin percent declined to 33.1% of sales in fiscal 2004, compared to 33.4% in fiscal 2003.

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Earnings per share (“EPS”) growth is an indicator of the returns generated for the Company’s stockholders. EPS grew to $1.50 per diluted share, compared to $1.23 per diluted share for the prior fiscal year. Net earnings included a one-time tax-related benefit of approximately $618,000, or $0.14 per diluted share.

Results of Operations

The following table sets forth, for the fiscal years indicated, the components of the Company’s consolidated statements of operations expressed as a percentage of net sales:

	Fiscal Year Ended
	February 1, 2004			February 2, 2003			February 3, 2002