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

FORM 10-K

For the fiscal year ended January 30, 2005

OR

DUCKWALL-ALCO STORES, INC.

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

        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 3,631,927 shares of Common Stock, par value $.0001 per share, of the registrant held by non-affiliates of the registrant is $60,181,030 on August 2, 2004, based on a closing sale price of $16.57. As of April 8, 2005, there were 4,476,232 shares of Common Stock outstanding.

        Documents incorporated by reference: portions of the Registrant’s Proxy Statement for the 2005 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 January 30, 2005, the Company operates 266 retail stores located in the central United States, consisting of 186 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 266 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 186 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. The current ALCO store averages 20,600 square feet of selling space. However, the Company’s store expansion program is primarily directed toward opening stores with a design prototype of approximately 18,000 square feet of selling space (“Class 18 Stores”). Based on the Company’s experience, the design of the Class 18 Stores produces a greater return on investment for newly opened 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 5,500 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 2005, the Company remodeled 16 stores. During Fiscal 2004 and fiscal 2003, the Company remodeled 23 stores and 32 stores, respectively. 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 has also opened a net total of 22 new ALCO stores during the last four fiscal years that incorporate the enhanced merchandising concepts of the remodeled stores, bringing the total number of stores with this new format to 125 at the end of Fiscal 2005. The Company plans to open approximately eight to ten ALCO stores in fiscal 2006.

        To reduce the number of unproductive stores, the Company is in the process of closing 20 stores. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation-Subsequent Events.” The Company continues to close non-performing stores in competitive markets, which slows the growth of overall store count.

Store Development

        The Company expects to open approximately eight to ten ALCO stores during fiscal year 2006. 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. The following table summarizes the Company’s growth during the past three fiscal years:

        As of January 30, 2005, the Company owned 12 ALCO and one Duckwall location, and leased 174 ALCO and 79 Duckwall store locations. The Company’s present intention is to lease all new stores. The Company may own some of the ALCO locations, but will generally lease these store locations. The estimated investment to open a new Class 18 ALCO Store that is leased is approximately $625,000 for the equipment and inventory.

        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 29 of those markets, each of which has been approved by the Company for a new store location.

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 a staff of three Vice President - Divisional Merchandise Managers who are each responsible for specific product categories. The Company employs 19 merchandise buyers and five 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. Only one supplier accounted for more than 5% of the Company’s total purchases in Fiscal 2005 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 2006, 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 186 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. During the last three fiscal years, the Company has devoted resources to development of systems that have improved information available to management and improved specific operational efficiencies.

        Approximately 2,000 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 January 30, 2005, the Company operated 186 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 174 are leased by the Company. The ALCO stores average approximately 20,600 square feet of selling space, with an additional 5,000 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)

ALCO Stores (186)

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 27 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 138 markets in which the Company operates a Class 18 Store, only three markets have 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 forty percent 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 29, 2005.

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.

        Bruce C. Dale has served as President and Chief Executive Officer of the Company since March 28, 2005. Mr. Dale has approximately 35 years of experience in the retail industry. Mr. Dale was with Michaels Stores for ten years, where he served for eight of those years as president of Aaron Brothers Art & Framing.

        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.

        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 24 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 32 years of experience in the retail industry.

Employees

        As of January 30, 2005, the Company employed approximately 4,900 people. Of these employees, approximately 500 were employed in the general office and distribution center in Abilene, 3,900 in the ALCO stores and 500 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.

Government Regulation

        The Company is subject to numerous federal, state and local government laws and regulations, including those relating to the development, construction and operation of the Company’s stores. The Company is also subject to laws governing its relationship with employees, including minimum wage requirements, laws and regulations relating to overtime, working and safety conditions, and citizenship requirements. Material increases in the cost of compliance with any applicable law or regulation and similar matters could materially and adversely affect the Company.

        In 1996, Congress enacted The Small Business Job Protection Act of 1996 (the “Act”), raising the hourly minimum wage from $4.75 to $5.15 effective as of September 1, 1997. The majority of the Company’s store employees were paid hourly wages below these increased minimum wage rates. As a result, the Act increased the Company’s payroll expense. Additional increases in the minimum wage could have a material impact on the results of the Company’s operations if it is unable to pass those increased costs on to customers, or the Company can’t find ways to reduce SG&A expenses in other areas, or if sales are not increasing at a rate large enough to offset the impact.

Quarterly Fluctuations

        Quarterly results of operations have historically fluctuated as a result of retail consumers” purchasing patterns, with the highest quarter in terms of sales and profitability being the fourth quarter. Quarterly results of operations will likely continue to fluctuate significantly as a result of such patterns and may fluctuate due to the timing of new store openings.

Economic Conditions

        Similar to other retail businesses, the Company’s operations may be affected adversely by general economic conditions and events which result in reduced consumer spending in the markets served by its stores. Also, smaller communities where the Company’s stores are located may be dependent upon a few large employers or may be significantly affected by economic conditions in the industry upon which the community relies for its economic viability, such as the agricultural industry. This may make the Company’s stores more vulnerable to a downturn in a particular segment of the economy than the Company’s competitors, which operate in markets which are larger metropolitan areas where the local economy is more diverse.

Dependence on Officers

        The development of the Company’s business is largely dependent on the efforts of its current management team headed by Bruce C. Dale and four other executive officers, as well as 11 other officers. The loss of the services of one or more of these officers could have a material adverse effect on the Company.

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. As of January 30, 2005, such ALCO leases account for approximately 4,400,000 square feet of lease space, which expire as follows: approximately 409,952 square feet (9.3%) expire between January 30, 2005 and January 29, 2006; approximately 515,068 square feet (11.7%) expire between January 30, 2006 and January 28, 2007; and approximately 649,383 square feet (14.7%) expire between January 29, 2007 and January 28, 2008. The remainder of the leases expire through 2021. All Duckwall store leases have terms remaining of thirty eight months 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.

        The Company is in the process of closing 20 stores. Two of the closing stores are owned, and the remaining 18 stores comprise approximately 202,000 square feet of leased space.

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 January 30, 2005.

PART II

        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 2005 and 2004.

        As of April 8, 2005, there were approximately 1,249 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 2006.

Equity Compensation Plan Information

No Recent Dividend Payments; Restrictions on Payment of Dividends

        The Company has not paid a cash dividend on the Common Stock for more than five years, and it has no plans to commence paying cash dividends on the Common Stock. The Company’s revolving loan credit facility currently allows the payment of cash dividends unless certain loan covenants are triggered.

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).

Overview

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

        Store counts are as of January 30, 2005. The Company’s fiscal year ends on the Sunday closest to January 31. Fiscal 2005, 2004, and 2003 each consisted of 52 weeks. For subsequent information, see “—Subsequent Events.”

        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 2005. Significant financial items during Fiscal 2005 were:

        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 2005 Compared to Fiscal 2004.”

        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: