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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 May 1, 2005

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

        4,085,992 shares of common stock, $.0001 par value (the issuer’s only class of common stock), were outstanding as of May 1, 2005.

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

Assets

See accompanying notes to unaudited consolidated financial statements.

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

Liabilities and Stockholders’ Equity

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)

See accompanying notes to unaudited consolidated financial statements.

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

See accompanying notes to unaudited consolidated financial statements.

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

        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 2005 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.

        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.

        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 (loss) and net earnings (loss) per share would have changed to the pro forma amounts indicated in the table below:

        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:

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

(Dollars in Thousands Except Per Share Amounts)

OVERVIEW

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

        The thirteen weeks ended May 1, 2005 and May 2, 2004 are referred to herein as the first quarter of fiscal 2006 and 2005, respectively. For purposes of this management’s discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands.

        As used below the term “competitive market” refers to any town in which both an ALCO or Duckwall store and one or more national or regional full-line discount stores are located. The term “non-competitive market” refers to any town served by the Company where no national or regional full-line discount store is also located. The Company nevertheless faces competition in such markets from a variety of sources, including dollar stores, and national and regional full-line discount stores located within a reasonable driving distance.

        The non-competitive markets where the Company operates ALCO or Duckwall stores generally consist of small towns where population growth is generally steady, but not dramatic. As no direct competitor or national or regional full-line discount store is located in these towns, they are generally considered under-served by full-line discount retailers except for the presence of an ALCO or Duckwall store.

        Strategy. The Company’s overall business strategy involves identifying and opening stores in towns that will provide the Company with the highest return on investment. Although the Company prefers markets that don’t have direct competition, its strategy does not preclude it from entering competitive markets. Even in non-competitive markets, competition still exists, 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 other entities, such as mail order companies, specialty retailers, mass merchandisers, dollar stores, manufacturer’s outlets, and the internet.

        The Company is constantly evaluating the appropriate mix of merchandise to improve sales and gross margin performance. The Company uses centralized purchasing, merchandising, pricing and warehousing to obtain volume discounts, improve efficiencies and achieve consistency among stores and the best overall results. The

Company utilizes information obtained from its point-of-sale system and regular input from its store associates to determine its merchandise offerings.

        The Company has evaluated the costs and benefits of upgrading its current point-of-sale systems. The Company’s project team has selected a new point-of-sale system and is negotiating a contract with the various software and hardware vendors. The goal is to pilot the new system in one store during the second half of fiscal 2006. A required feature of this new point-of-sale system is perpetual inventory, which the Company does not currently have in its stores. Perpetual inventory allows tracking of on-hand quantities at the item level, and enables automated replenishment. Once the Company has on-hand information and the ability to automatically replenish items in the stores, the benefits of these new systems can be significant. For example, the Company estimates it can reduce its inventory levels by 5% to 10%, and potentially more, because the system will have parameters set at the item level relating to how much inventory to order based on criteria set centrally. A reduction in inventory will improve the Company’s return on assets ratio. In addition to lowering inventory, the new system has the potential to improve in-stock levels in the stores, thereby increasing same-store sales and profits. The new system will also enable other improvements in the stores which are not available today due to technology limitations. Once those limitations are removed, the Company expects to re-engineer the stores to take full advantage of the new technology.

        The Company, when appropriate, implements new merchandising and marketing initiatives in an effort to increase customer traffic and same-store sales. Over the last four years, the Company has rolled out an improved merchandise mix, with greater emphasis on consumables and everyday low values that are highlighted through a new and more dominant sign program. In fiscal 2005, the Company converted its first three ALCO stores to an “ALCO Market Place” store. This new format devotes approximately one fourth of its floor space to a limited, but greatly expanded assortment of foods, including produce, dry goods and products displayed in freezers and coolers. During the first quarter of fiscal 2006, three additional stores were converted to the Market Place format, bringing the total number of stores with the Market Place format to six. The Company continues to evaluate the results of this new concept, and intends to use successful elements of the format in stores that haven’t been converted to that format.

        The Company is also proactive in looking for and implementing ways to improve the bottom line through expense reductions in selling, general and administrative expenses (“SG&A”). The Company finalized its restructuring plan on April 28, 2005 and on May 3, 2005, the Company publicly announced the restructuring. The restructuring is designed to help the Company more effectively compete in today’s competitive retail environment. As a part of the restructuring, 46 corporate positions were eliminated, which will result in an annualized savings of approximately $2,200. One-time costs associated with the restructuring were approximately $734. Other examples of proactive measures the Company has taken to control expenses include efforts to reduce rapidly escalating workers compensation expenses and medical insurance costs, as discussed under the heading “Critical Accounting Policies.”

        The Company’s top priority is improving stockholder value and it has taken aggressive actions over the years to achieve that objective, including the engagement of top advisers to help identify opportunities to improve its performance. In the second half of Fiscal 2005, the Company engaged a business advisory firm to do a strategic and operational review of the Company. Based upon the report’s conclusions and recommendations, Company management plans to develop short and long-term initiatives to improve its performance. The Company’s management, the Board and other advisors will also examine other means of enhancing stockholder value.

        Recent Events. On March 17, 2005, the Company announced that, as part of its initiatives designed to improve performance of the Company for its shareholders, it will be closing 8 ALCO and 12 Duckwall stores that do not meet the Company’s minimum return on investment threshold. The process to close these stores began immediately, and the Company expects it will take approximately three months to complete. The Company has engaged Gordon Brother Retail Partners, LLC to assist in the orderly inventory liquidation and to help minimize the total cost of closing these stores. The Company’s primary lender, Fleet Retail Group, Inc., has consented to these closings. The Company estimates that pursuant to these store closings, it will liquidate approximately $6,500 of inventory. Of the stores being closed, the Company owns the property on which two ALCO stores are located and leases the properties for the remaining 18 stores. The company anticipates that the aggregate cost to close these stores, before income taxes, will be in the range of $3,800 to $4,800. The majority of that expense will be recorded in the first and second quarters of Fiscal Year 2006. The twenty stores that are closing produced gross sales of $19,900 in Fiscal Year 2005, and employed approximately 260 associates.

        On April 19, 2005, the Company reached an agreement with a significant stockholder to repurchase 399,362 shares of the Company’s Common Stock for approximately $7,200. These shares will be retired. The Board of Directors approved this transaction and increased the number of shares the Company was authorized to repurchase by 399,362.

        Key Items in Fiscal 2006. 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 2006 were:

        Same store sales growth is a measure which may indicate whether existing stores are maintaining their market share. Other factors, such as the overall economy, may also affect same store sales. The Company defines same stores as those stores that were open as of the first day of the prior fiscal year and remain open at the end of the reporting period. While the same store sales for all Company stores decreased 0.1% compared to the first quarter last year, the ALCO stores in non-competitive markets, which represent 144 of the ALCO stores as of the end of the first quarter, increased 0.1%, and the Duckwall stores sales increased 2.6% during the first quarter of fiscal 2006.

        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 decreased to 31.2% of sales in the first quarter of fiscal 2006, compared to 33.0% in the first quarter of fiscal 2005.

        Earnings per share (“EPS”) growth is an indicator of the returns generated for the Company’s stockholders. EPS from continuing operations was reduced to ($0.26) per diluted share for the first quarter of fiscal 2006, compared to $0.14 per diluted share for the first quarter of the prior fiscal year.

CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS AND FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS, FINANCIAL CONDITION OR BUSINESS

        Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact may constitute “forward-looking statements” within the meaning of Section 21E of the Exchange Act. These statements are subject to risks and uncertainties, as described below. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, income or loss, earnings or loss per share, capital expenditures, store openings, store closings, payment or non-payment of dividends, capital structure and other financial items, (ii) statements of plans and objectives of the Company’s management or Board of Directors, including plans or objectives relating to inventory, store development, marketing, competition, business strategy, store environment, merchandising, purchasing, pricing, distribution, transportation, store locations and information systems, (iii) statements of future economic performance, and (iv) statements of assumptions underlying the statements described in (i), (ii) and (iii). Forward-looking statements can often be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” “could,” “intends,” “plans,” “estimates”, “projects” or “anticipates,” variations thereof or similar expressions.

        Forward-looking statements are not guarantees of future performance or results. They involve risks, uncertainties and assumptions. The Company’s future results of operations, financial condition and business operations may differ materially from the forward-looking statements or the historical information stated in this Quarterly Report on Form 10-Q. Stockholders and investors are cautioned not to put undue reliance on any forward-looking statement.

        There are a number of factors and uncertainties that could cause actual results of operations, financial condition or business contemplated by the forward-looking statements to differ materially from those discussed in the forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company,

including those factors described below. Other factors not identified herein could also have such an effect. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements and from historical information include, but are not limited to, those factors described below.

CRITICAL ACCOUNTING POLICIES

        Inventory: As discussed in Note 1 (d) to the Consolidated Financial Statements, inventories are stated at the lower of cost or net realizable value with cost determined using the last-in, first-out (LIFO) method. The retail inventory method (“RIM”) used by the Company is an averaging method that has been widely used in the retail industry. This method calculates a cost to retail ratio that is applied to the retail value of inventory to calculate cost inventory and the resulting gross margin. Use of the RIM method does not eliminate the use of management judgments and estimates, including markdowns and shrinkage, which significantly impact the ending inventory valuation at cost and the resulting gross margins. The Company continually evaluates product categories to determine if markdown action is appropriate, or if a markdown reserve should be established. The Company recognizes that the use of the RIM will result in valuing inventories at lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories. As of May 1, 2005 and May 2, 2004, the Company had recorded markdowns that had not been taken and which served to reduce inventories to lower of cost or market by approximately $901 and $741, respectively. Management believes that the RIM provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market.

        Property and Equipment: The Company’s policy is to capitalize property and equipment if it has a useful life beyond one year. Major improvements are capitalized, while maintenance and repairs, which do not extend the useful life of the asset, are expensed as incurred. The nature and extent of the repair, as well as the relative dollar amount of the repair in relation to the cost of the asset determine whether the expenditure is capitalized or expensed.

        Impairment of Long-Lived Assets: The Company considers determination of impairment of long-lived assets as a critical accounting policy because determination as to whether the long-lived assets of a store are impaired and, if impaired, the fair value of such assets requires the use of judgment, particularly as it relates to projecting whether the sum of expected undiscounted future cash flows for the store over an extended period of time will equal or exceed the carrying value of such assets. Management uses the best information available to make the determination; however, actual future cash flows for the store may vary significantly from the cash flows projected in conjunction with the impairment assessment. The potential impact on the financial statements of incorrect judgments regarding impairment of long-lived assets is that a provision for impairment could be needlessly recorded if projected future cash flows for a store are significantly under estimated or a provision for impairment could be deferred until later determined necessary in a future period if initial projected cash flows are over estimated. See Note 1(l) of Notes to Consolidated Financial Statements for a description of the Company’s accounting policy for impairment of long-lived assets.

        Insurance: The Company considers general insurance cost a critical accounting policy. As described below, the Company is essentially self insured for its workers compensation, medical insurance and general liability insurance. Due to the fact that it takes more than one year to determine the actual costs under these plans, these costs are estimated based on the Company’s historical loss experience and estimates from the insurance carriers and consultants.

        Income Taxes: The Company’s tax provision and establishment of reserves for potential tax liabilities involves the use of estimates and professional judgment. The Company has identified exposures for which they have established a reserve, such as differences in interpretation of tax laws at the federal, state, and local units of government.

RESULTS OF OPERATIONS

Thirteen Weeks Ended May 1, 2005 Compared to Thirteen Weeks Ended May 2, 2004.

        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 first quarter of fiscal 2006 the Company opened one Duckwall store, and converted three ALCO stores into ALCO Market Place stores. Two ALCO stores and six Duckwall stores were closed in the current period. The operations of stores closed in the current and prior year, as well as the operations of eight ALCO stores and six Duckwall stores that are still in the process of closing, have been reflected as discontinued operations in all periods presented. As of May 1, 2005 over 88% of the Company’s 259 stores are in non-competitive markets.

        Net Sales

        Net sales for the first quarter of fiscal 2006 increased $2,675 or 2.8% to $98,026 compared to $95,351 for the first quarter of fiscal 2005. Same store sales decreased 0.1% when compared with the prior year. The Company believes that sales were unfavorably impacted by an unusually cool and rainy spring, resulting in lower than expected sales in the spring merchandise categories.

        Gross Margin

        Gross margin for the first quarter of fiscal 2006 decreased $945 or 3.0% to $30,560 compared to $31,505 in the first quarter of fiscal 2005. Gross margin as a percentage of sales was 31.2% for the first quarter of fiscal 2006 compared to 33.0% for the first quarter of fiscal 2005. The decrease in the gross margin percentage was due primarily to higher markdowns due the Company’s efforts to lower its inventory, as well as taking more aggressive markdown action in-season to clear out seasonal merchandise. Also negatively impacting the gross margin percentage were higher transportation costs resulting from higher fuel prices.

        SG&A

        Selling, general and administrative expense increased $2,062 or 7.2% to $30,592 in the first quarter of fiscal 2006 compared to $28,530 in the first quarter of fiscal 2005. As a percentage of net sales, selling, general and administrative expenses in the first quarter of fiscal 2006 were 31.2%, compared to 29.9% in the first quarter of fiscal 2005. The increase in the selling, general and administrative expense percentage was largely one-time costs of approximately $734 associated with the Company’s restructuring and workforce reduction. Other one-time costs impacting operating expenses for the quarter were costs associated with the retirement of the former Chief Executive Officer and hiring of the new Chief Executive Officer, which amounted to $338.

        Depreciation and Amortization

        Depreciation and amortization expense decreased $152 or 9.0% to $1,547 in the first quarter of fiscal 2006 compared to $1,699 in the first quarter of fiscal 2005. The decrease is primarily due to store fixtures and equipment becoming fully depreciated in the current fiscal year on a large number of ALCO stores that were opened in fiscal year 1997.

        Operating Income

        Operating income from continuing operations decreased $2,855 or 223.8% to ($1,579) in the first quarter of fiscal 2006 compared to $1,276 in the first quarter of fiscal 2005. The combination of reduced margins and increased Selling, General, and Administrative costs resulted in the large reduction in operating income. Operating income from continuing operations as a percentage of net sales was (1.6%) in the thirteen week period ending May 1, 2006 compared to 1.3% for the thirteen week period of the prior fiscal year.

        Interest Expense

        Interest expense decreased $72 or 25.5% to $210 in the first quarter of fiscal 2006 compared to $282 in the first quarter of fiscal 2005. The reduction in interest expense was due primarily to lower levels of borrowing for the thirteen week period of fiscal 2005.

        Income Taxes

        The Company’s effective tax rate for the first quarter of fiscal 2006 was 35.4%, compared to 38.0% in the first quarter of fiscal 2005. The effective tax rate was higher in the prior year, as certain employment tax credits had expired. These credits were subsequently reinstated, and the prior year’s tax rate was adjusted at that time.

        Earnings (loss) from Continuing Operations

        Earnings (loss) from continuing operations for the first quarter of fiscal 2006 were ($1,156), a decrease of $1,772 or 287.7% from the earnings from continuing operations of $616 for the first quarter of fiscal 2005. The decrease was a result of the reduced operating income as discussed above.

        Earnings (Loss) from Discontinued Operations

        Loss from discontinued operations, net of income tax, was $1,574 in the first quarter of fiscal 2006, compared to an income from discontinued operations of $71 in the first quarter of fiscal 2005. The increase in loss from discontinued operations was the result of the decision to close twenty stores in the first quarter of fiscal 2006, compared to three store closings in the prior fiscal year. The operations of closed stores have been reflected as discontinued operations in all periods presented.

        Net Earnings (Loss)

        Net loss for the first quarter of fiscal 2006 was $2,730, a decrease of $3,417 or 497.4% from the net earnings of $687 in the first quarter of fiscal 2005. Diluted net loss per share for the first quarter of fiscal 2006 was $0.62, a decrease of $0.78, or 487.5% from the diluted net earnings per share of $0.16 in the first quarter of fiscal 2005.

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 May 1, 2005 working capital (defined as current assets less current liabilities) was $82,629 compared to $95,431 at the end of fiscal 2005. The reduction in working capital was attributable to the reclassification of the revolving loan as current, as it is due in April 2006, and the reduction in inventory due to the decision to close twenty stores. The Company and its lender, Bank of America, agreed to extend the revolving loan credit facility on June 1, 2006. The loan will be due on April 15, 2010.

        The Company has a loan agreement with its lenders that provides a revolving loan credit facility of up to $70,000 of long-term financing. The amount advanced (through a note or letters of credit) to the Company under the credit facility bears interest at (i) the prime rate plus a margin, as defined, which varies based on the amount outstanding (Base Loan) or (ii) based on the Euro dollar rate plus a margin, as defined, (Index Loan). Based upon its projected financial requirements, the Company uses a combination of short term Euro dollar contracts and borrowing at prime. The amount advanced is generally limited to 70% of eligible inventory, as defined in the loan agreement. Advances are secured by a security interest in the Company’s inventory. The loan agreement contains various restrictions that are applicable when outstanding borrowings reach certain thresholds, including limitations on additional indebtedness, acquisitions of assets and payment of dividends. The loan agreement expires on April 15, 2010. As of May 1, 2005, the Company has borrowed $6,081 under this facility. The lender had also issued letters of credit aggregating $3,610 at such date on behalf of the Company.

        Cash provided by (used in) operating activities in the thirteen week period of fiscal 2006 and 2005 was $8,608 and ($5,385) respectively. The increase in the amount of cash provided by operating activities in the thirteen week period of fiscal 2006 compared to the thirteen week period of fiscal 2005 was primarily due to a decrease in inventory, a larger increase in accounts payable, and an increase in accrued salary and commission.

        Total anticipated cash payments for acquisition of property and equipment in fiscal 2006, principally for improvements, store buildings and store and warehouse fixtures and equipment are approximately $10,000. Cash used in investing activities (including acquisitions and remodeling) in the thirteen week period of fiscal 2006 and 2005 totaled $1,276 and $1,062, respectively, which were used primarily for those same purposes.

        The Company (used) generated cash from financing activities in the thirteen week period of fiscal 2006 and 2005 of ($5,238) and $6,892 respectively. Borrowings on the revolving loan generated $2,058 during the thirteen week ended May 1, 2006, compared to $6,788 during the thirteen week period of the prior fiscal year. Cash was used to purchase and retire 399,362 shares of Common Stock during the thirteen week period of fiscal 2006 for $7,188. In addition to the current purchase of stock, the Board of Directors of the Company has authorized the Company to repurchase up to 1,411,000 other shares, of which 1,084,600 shares had been purchased as of May 1, 2005. The Company continues to evaluate the timing and pricing of future share repurchases.

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.

Income from operations as reflected in the above segment information has been determined differently than income from operations in the accompanying consolidated statements of operations as follows:

A reconciliation of the segment information to the amounts reported in the consolidated financial statements is presented below:

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. 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 amounts outstanding under this facility as of May 1, 2005, the Company does not consider its exposure to interest rate risk to be material.

ITEM 4. CONTROLS AND PROCEDURES

        As of the end of the period covered by this report, an evaluation was carried out under the supervision and with the participation of Company management, including the Company’s President and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.

Based upon and as of the date of the evaluation, the Company’s President and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective in all material respects to provide reasonable assurance that information required to be disclosed in the reports it files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.

        There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended May 1, 2005 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

SIGNATURES

        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.

EXHIBIT INDEX