ALCO STORES INC - FORM 10-Q - September 9, 2010

Attached files

file	filename
EX-31.2 - PFO CERTIFICATION - ALCO STORES INC	pfocertification.htm
EX-31.1 - CEO CERTIFICATION - ALCO STORES INC	ceocertification.htm
EX-32.1 - CEO SOX CERTIFICATION - ALCO STORES INC	ceosoxcertification.htm
EX-32.2 - PFO SOX CERTFICATION - ALCO STORES INC	pfosoxcertification.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended August 1, 2010

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

Commission File Number 0-20269

DUCKWALL-ALCO STORES, INC.

(Exact name of registrant as specified in its charter)

Kansas	48-0201080
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

401 Cottage Street Abilene, Kansas	67410-2832
(Address of principal executive offices)	(Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

NONE

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $.0001 per share

(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES NO X

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES NO X

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES NO X

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “accelerated filer", "large accelerated filer” and "smaller reporting company" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES NO X

APPLICABLE ONLY TO CORPORATE ISSUERS:

3,839,395 shares of common stock, $.0001 par value (the issuer's only class of common stock), were outstanding as of August 1, 2010.

DUCKWALL-ALCO STORES, INC.

TABLE OF CONTENTS

PART I	FINANCIAL INFORMATION
	Item 1.	Financial Statements	3
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	9
	Item 3.	Quantitative and Qualitative Disclosure About Market Risk	16
	Item 4.	Controls and Procedures	16

PART II	OTHER INFORMATION
	Item 1.	Legal Proceedings	17
	Item 1A.	Risk Factors	17
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	17
	Item 3.	Defaults Upon Senior Securities	17
	Item 4.	Reserved	17
	Item 5.	Other Information	17
	Item 6.	Exhibits	18

Signature			20

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Duckwall-ALCO Stores, Inc.
Consolidated Balance Sheets
(dollars in thousands, except share and per share amounts)
Assets
	August 1, 2010		January 31, 2010
	(Unaudited)
Current assets:
Cash and cash equivalents	$	3,690		5,164
Receivables		5,395		7,437
Prepaid income taxes		2,051		594
Inventories		140,274		140,375
Prepaid expenses		4,022		3,517
Deferred income taxes		4,307		3,863
Assets held for sale		1,181		1,631
Total current assets		160,920		162,581

Property and equipment, at cost:
Land and land improvements		1,454		1,455
Buildings and building improvements		11,896		11,844
Furniture, fixtures and equipment		69,769		67,304
Transportation equipment		1,357		1,303
Leasehold improvements		15,929		14,855
Construction work in progress		890		1,744
Total property and equipment		101,295		98,505
Less accumulated depreciation		71,819		67,959
Net property and equipment		29,476		30,546

Property under capital leases		17,815		11,015
Less accumulated amortization		10,062		9,385
Net property under capital leases		7,753		1,630

Other non-current assets		1,203		51
Total assets	$	199,352		194,808

Liabilities and Stockholders' Equity
Current liabilities:
Current maturities of long-term debt	$	1,498		1,451
Current maturities of capital lease obligations		1,084		1,623
Accounts payable		29,979		23,076
Accrued salaries and commissions		4,415		4,122
Accrued taxes other than income		5,160		4,913
Self-insurance claim reserves		4,180		4,852
Other current liabilities		4,821		4,499
Total current liabilities		51,137		44,536

Long term debt, less current maturities		653		1,414
Notes payable under revolving loan agreement		29,912		35,159
Capital lease obligations - less current maturities		7,596		1,345
Deferred gain on leases		4,019		4,212
Deferred income taxes		1,078		694
Other noncurrent liabilities		1,835		1,715
Total liabilities		96,230		89,075

Stockholders' equity:
Common stock, $.0001 par value, authorized 20,000,000 shares; issued and outstanding
3,839,395 shares and 3,797,947 shares, respectively		1		1
Additional paid-in capital		39,930		39,313
Retained earnings		63,191		66,419
Total stockholders' equity		103,122		105,733
Total liabilities and stockholders' equity	$	199,352		194,808

See accompanying notes to unaudited consolidated financial statements.

Duckwall-ALCO Stores, Inc.
Consolidated Statements of Operations
(dollars in thousands, except per share amounts)
(Unaudited)

	For the Thirteen Week						For the Twenty-Six Week
	Periods Ended						Periods Ended
	August 1, 2010			August 2, 2009			August 1, 2010			August 2, 2009

Net sales	$	118,158			125,029			231,181			240,189
Cost of sales		80,572			82,706			158,424			159,418
Gross margin		37,586			42,323			72,757			80,771

Selling, general and administrative		36,210			34,505			71,025			70,107
Depreciation and amortization		2,501			2,268			4,983			4,645
Total operating expenses		38,711			36,773			76,008			74,752
Operating income (loss) from continuing operations		(1,125	)		5,550			(3,251	)		6,019

Interest expense, net		721			521			1,395			1,057

Earnings (loss) from continuing operations before income taxes		(1,846	)		5,029			(4,646	)		4,962


Income tax expense (benefit)		(545	)		1,985			(1,555	)		1,952

Earnings (loss) from continuing operations		(1,301	)		3,044			(3,091	)		3,010


Earnings (loss) from discontinued operations, net of income tax expense (benefit)		4			(14	)		(137	)		(29	)

Net earnings (loss)	$	(1,297	)		3,030			(3,228	)		2,981

Earnings (loss) per share
Basic
Continuing operations	$	(0.34	)		0.80			(0.81	)		0.79
Discontinued operations		-			-			(0.04	)		(0.01	)

Net earnings (loss) per share	$	(0.34	)		0.80			(0.85	)		0.78

Earnings (loss) per share
Diluted
Continuing operations	$	(0.34	)		0.78			(0.81	)		0.78
Discontinued operations		-			-			(0.04	)		(0.01	)

Net earnings (loss) per share	$	(0.34	)		0.78			(0.85	)		0.77

See accompanying notes to unaudited consolidated financial statements.

Duckwall-ALCO Stores, Inc.
Consolidated Statements of Cash Flows
(dollars in thousands)
(Unaudited)
	For the Twenty-Six Week
	Periods Ended
	August 1, 2010			August 2, 2009

Cash flows from operating activities:
Net earnings (loss)	$	(3,228	)		2,981

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

Depreciation and amortization		4,985			4,606
Gain on sale of assets		(7	)		(1	)
Share-based compensation		200			446
Tax benefit of stock options exercised		13			-
Deferred income tax expense, net		(60	)		(65	)
Changes in:
Receivables		2,042			(514	)
Prepaid income taxes		(1,457	)		5,330
Inventories		101			(1,879	)
Prepaid expenses		(505	)		76
Accounts payable		6,903			(4,551	)
Accrued salaries and commissions		293			(743	)
Accrued taxes other than income		247			(149	)
Self-insurance claim reserves		(672	)		(468	)
Other assets and liabilities		396			(242	)
Net cash provided by operating activities		9,251			4,827

Cash flows from investing activities:
Proceeds from the sale of assets		640			3
Acquisition of property and equipment		(3,495	)		(3,089	)
Net cash used in investing activities		(2,855	)		(3,086	)

Cash flows from financing activities:
Net (paydowns) borrowings under revolving loan agreement		(5,247	)		594
Revolving loan agreement financing costs		(1,300	)		-
Proceeds from exercise of outstanding stock options		419			-
Excess tax benefit on stock options exercised		(15	)		-
Principal payments under term loan		(714	)		(670	)
Principal payments under capital lease obligations		(1,013	)		(963	)
Net cash used in financing activities		(7,870	)		(1,039	)

Net increase (decrease) in cash and cash equivalents		(1,474	)		702
Cash and cash equivalents at beginning of period		5,164			4,744

Cash and cash equivalents at end of period	$	3,690			5,446

Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	1,361			1,064
Income taxes, net of refunds received		(129	)		278

See accompanying notes to unaudited consolidated financial statements.

Duckwall-ALCO Stores, Inc.

Notes to Unaudited Consolidated Financial Statements

(dollars in thousands, except share and per share amounts or as otherwise noted)

(1) Basis of Presentation

The accompanying unaudited consolidated financial statements of Duckwall-ALCO Stores, Inc. (the "Company") are for interim periods and have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. It is suggested that the accompanying unaudited consolidated financial statements be read in conjunction with the consolidated financial statements included in the Company's fiscal 2010 Annual Report. In the opinion of management of the Company, the accompanying unaudited consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position of the Company and the results of its operations and cash flows for the interim periods. Because the Company’s business is moderately seasonal, the results from interim periods are not necessarily indicative of the results to be expected for the entire year.

Fiscal 2011 and 2010 are both 52-week fiscal years consisting of four thirteen week periods referred to as quarters. The thirteen weeks ended August 1, 2010 and August 2, 2009 are referred to herein as the second quarter of fiscal 2011 and 2010, respectively.

The depreciation and amortization amount from the Consolidated Statements of Operations may not agree to the Consolidated Statements of Cash Flows due to the fact that a portion of the depreciation and amortization from the Consolidated Statements of Cash Flows is included in the loss from discontinued operations, net of income tax benefit line of the Consolidated Statements of Operations.

The Company opened three new ALCO stores during the first half of fiscal 2011, and it was determined that these stores qualified as capital leases. The Company has accounted for these stores as capital leased property and recorded $6.8 million in property under capital lease.

(2) Principles of Consolidation

The consolidated financial statements include the accounts of the Company. All significant intercompany transactions have been eliminated.

(3) Share-Based Compensation

Effective with fiscal 2007, the Company began recognizing compensation for its share-based payments based on the fair value of the awards. Share-based payments consist of stock option grants. For the thirteen weeks ended August 1, 2010 and August 2, 2009, share-based compensation decreased pre-tax income by $119 and $261, respectively. For the twenty-six weeks ended August 1, 2010 and August 2, 2009 share-based compensation decreased pre-tax income by $200 and $446, respectively.

Forfeitures are estimated at the time of valuation and reduce expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.

Stock Incentive Plan

Under our 2003 Incentive Stock Option Plan, options may be granted to officers and key employees, not to exceed 500,000 shares. According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. In the case of a stockholder owning more than 10% of the outstanding voting stock of the Company, the exercise price of an incentive stock option may not be less than 110% of the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. Also, the aggregate fair market value of the stock with respect to which incentive stock options are exercisable on a tax deferred basis for the first time by an individual in any calendar year may not exceed $100. In the event that the foregoing results in a portion of an option exceeding the $100 limitation, such portion of the option in excess of the limitation shall be treated as a non-qualified stock option. At August 1, 2010, the Company had 167,845 shares authorized for future option grants. The Company issues these grants from the unissued shares authorized.

Under our Non-Qualified Stock Option Plan for Non-Management Directors, options may be granted to Directors of the Company who are not otherwise officers or employees of the Company, not to exceed 200,000 shares. According to the terms of the plan, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. All options under the plan shall be non-qualified stock options. There are 98,957 shares remaining to be issued under this plan.

Under our Non-Qualified Stock Option Agreement with Lawrence J. Zigerelli as part of his starting employment with the Company on July 1, 2008, Mr. Zigerelli was granted the right to purchase 10,000 shares of the Company’s common stock. According to the terms of the Agreement, the per share exercise price of options granted shall not be less than the fair market value of the stock on the date of grant and such options will expire no later than five years from the date of grant. The options vest in equal amounts over a four year requisite service period beginning from the grant date unless certain Company events occur. The unvested portion of these options terminated during the first quarter of fiscal 2011 due to the separation of Mr. Zigerelli from the Company. Mr. Zigerelli exercised the 2,500 shares vested under this Agreement. The Company issued these grants from the unissued shares authorized. There are no shares remaining to be issued under this Agreement.

The fair value of each option grant is separately estimated. The fair value of each option is amortized into share-based compensation on a straight-line basis over the requisite service period as discussed above. We have estimated the fair value of all stock option awards as of the date of the grant by applying a modified Black-Scholes pricing valuation model. The application of this valuation model involves assumptions that are judgmental and highly sensitive in the determination of share-based compensation, including expected stock price volatility.

The following summarizes information concerning stock option grants during fiscal 2010 and 2009:

			For the Thirteen Week				For the Twenty-Six Week
	Fiscal 2010 Ended		Periods Ended				Periods Ended
	January 31, 2010		August 1, 2010		August 2, 2009		August 1, 2010		August 2, 2009
Stock options granted		45,000		-		20,000		100,000		35,000
Weighted average exercise price	$	13.95		-		15.50		14.34		12.82
Weighted average grant date fair value	$	5.47		-		6.55		6.36		5.40

The weighted average for key assumptions used in determining the fair value of options granted in the thirteen and twenty-six week periods ended August 1, 2010 and August 2, 2009, and a summary of the methodology applied to develop each assumption are as follows:

				For the Thirteen Week					For the Twenty-Six Week
	Fiscal 2010 Ended			Periods Ended					Periods Ended
	January 31, 2010			August 1, 2010		August 2, 2009			August 1, 2010			August 2, 2009
Expected price volatility		48.9	%		NA		54.3	%		51.1	%		51.6	%
Risk-free interest rate		1.5	%		NA		1.4	%		1.5	%		1.4	%
Weighted average expected lives in years		4.8			NA		3.8			4.8			4.2
Dividend yield		0.00	%		NA		0.00	%		0.00	%		0.00	%

EXPECTED PRICE VOLATILITY -- This is a measure of the amount by which a price has fluctuated or is expected to fluctuate. The Company uses actual historical changes in the market value of its stock to calculate expected price volatility because management believes that this is the best indicator of future volatility. The Company calculates monthly market value changes from the date of grant over a past period to determine volatility. An increase in the expected volatility will increase share-based compensation.

RISK-FREE INTEREST RATE -- This is the applicable U.S. Treasury rate for the date of the grant over the expected term. An increase in the risk-free interest rate will increase share-based compensation.

EXPECTED LIVES -- This is the period of time over which the options granted are expected to remain outstanding and is based on management’s expectations in relation to the holders of the options. Options granted have a maximum term of five years. An increase in the expected life will increase share-based compensation.

DIVIDEND YIELD --- The Company has not made any dividend payments nor does it have plans to pay dividends in the foreseeable future. An increase in the dividend yield will decrease share-based compensation.

As of August 1, 2010, total unrecognized share-based compensation related to non-vested stock options is $826 with a weighted average expense recognition period of 2.8 years.

(4) Accounting for Income Taxes

The Company recorded decreases in gross unrecognized tax benefits, inclusive of related interest, of $7 and $9 for the twenty-six week periods ended August 1, 2010 and August 2, 2009, respectively. None of the amounts recorded as unrecognized tax benefits would impact the effective income tax rate if recognized.

The statute of limitations for our federal income tax returns is open for 2006 through 2008. We file in numerous state jurisdictions with varying statutes of limitation. State returns are open from 2005 through 2008 or 2006 through 2008 depending on each state’s statute of limitations.

(5) Subsequent Events

The Company has evaluated subsequent events for potential disclosure or recognition to the date of the issuance of the consolidated financial statements.

(6) Fair Value Measurements

The financial instruments of the Company consist of cash and cash equivalents, short-term receivables and accounts payable, accrued expenses and long-term debt instruments, including capital leases. For notes payable under the revolving loan agreement, fair value approximates the carrying value due to the variable interest rate. Based on the borrowing rates currently available to the Company for debt with similar terms, the fair value of term debt at August 1, 2010 approximates its carrying amount of $2.2 million. For all other financial instruments including cash and cash equivalents, short-term receivables, accounts payable and accrued expenses, the carrying amounts approximate fair value due to the short maturity of those instruments.

(7) Earnings Per Share

Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares outstanding. Diluted net earnings per share reflects the potential dilution that could occur if contracts to issue securities (such as stock options) were exercised, except for those periods with a loss.

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

Thirteen Weeks Ended	Basic		Diluted

August 1, 2010		3,835,509		3,835,509
August 2, 2009		3,797,947		3,901,920


Twenty-Six Weeks Ended	Basic		Diluted

August 1, 2010		3,823,332		3,823,332
August 2, 2009		3,797,947		3,856,596

(8) Store Closings and Discontinued Operations

The Company closed four Duckwall stores in the first quarter of fiscal 2011. The operations of these stores were reclassified to discontinued operations in the first quarter of fiscal 2011. The Company closed one Duckwall during the second quarter of fiscal 2010. All prior period amounts for closed stores have been reclassified to discontinued operations.

(9) New Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2009-16, which updated Accounting Standards Codification ("ASC") Topic 810, Accounting for Transfers of Financial Assets, which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. The Company adopted this standard as of February 1, 2010. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.

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

In August 2009, FASB issued ASU No. 2009-05 which amends ASC Topic 820, Fair Value Measurements and Disclosures (“Topic 820”), to provide guidance on the fair value measurement of liabilities. This update requires clarification for circumstances in which a quoted price in an active market for the identical liability is not available. A reporting entity is required to measure fair value using one or more of the following techniques: 1) a valuation technique that uses either the quoted price of the identical liability when traded as an asset or quoted prices for similar liabilities when traded as an asset; or 2) another valuation technique that is consistent with the principles in Topic 820 such as the income and market approach to valuation. This update also clarifies that when estimating the fair value of a liability, a reporting entity is not required to include a separate input or adjustment to other inputs relating to the existence of a restriction that prevents the transfer of the liability. This update further clarifies that if the fair value of a liability is determined by reference to a quoted price in an active market for an identical liability, that price would be considered a Level 1 measurement in the fair value hierarchy. Similarly, if the identical liability has a quoted price when traded as an asset in an active market, it is also a Level 1 fair value measurement if no adjustments to the quoted price of the asset are required. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.

In January 2010, the FASB issued ASU No. 2010-06, “Improving Disclosures about Fair Value Measurements” an amendment to ASC Topic 820, “Fair Value Measurements and Disclosures.” This amendment requires an entity to: 1) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers, 2) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements and 3) enhance disclosures of assets and liabilities subject to fair value measurements. The provisions of ASU No. 2010-06 are effective for the Company for interim and annual reporting beginning after December 15, 2009, with one new disclosure effective after December 15, 2010. The Company adopted this ASU as of February 1, 2010. The adoption of this standard did not impact the Company’s financial position or results of operations.

In February 2010, the FASB issued ASU No. 2010-09, “Subsequent Events ("Topic 855"): Amendments to Certain Recognition and Disclosure Requirements.” The amendments remove the requirements for an SEC filer to disclose a date, in both issued and revised financial statements, through which subsequent events have been reviewed. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of GAAP. ASU No. 2010-09 was effective upon issuance. The adoption of this guidance did not impact the Company’s financial condition, results of operations or cash flows.

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

(dollars in thousands except per share amounts or as otherwise noted)

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

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

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

There are a number of factors and uncertainties that could cause actual results of operations, financial condition or business contemplated by the forward-looking statements to differ materially from those discussed in the forward-looking statements made herein or elsewhere orally or in writing, by, or on behalf of, the Company, including those factors described below. Other factors not identified herein could also have such an effect. Factors that could cause actual results to differ materially from those discussed in the forward-looking statements and from historical information include, but are not limited to, those factors described below.

OVERVIEW

Economic conditions. The current economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of mortgage loan default and personal bankruptcy, and declining consumer and business confidence, which has led to decreased customer traffic and reduced levels of consumer spending, particularly on discretionary items. This decline in consumer and business confidence and the decreased levels of customer traffic and consumer spending have negatively impacted our business. We cannot predict how long the current economically challenging conditions will persist and how such conditions might affect us and our customers. Decreased customer traffic and reduced consumer spending, particularly on discretionary items, would, however, over an extended period of time negatively affect our financial condition, operating performance, revenues and income.

Management does not believe that its merchandising operations, net sales, revenue, or income (loss) from continuing operations have been materially impacted by inflation during the past two fiscal years. The Company will continue to monitor costs, take advantage of vendor incentive programs, selectively buy from competitive vendors and adjust merchandise prices based on market conditions.

Operations. The Company is a regional broad line retailer operating in 23 states in the central United States. The Company’s fiscal year ends on the Sunday closest to January 31. Fiscal years 2010 and 2009 consisted of 52 weeks and fiscal year 2008 consisted of 53 weeks. For purposes of this management's discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands.

Strategy. The Company’s overall business strategy involves identifying and opening stores in locations that will provide the Company with the highest return on investment. The Company prefers markets that do not have direct competition from national or regional broad line retail stores. The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, dollar stores, manufacturer’s outlets and the internet.

The Company uses a variety of broad-based targeted marketing and advertising strategies to reach consumers. These strategies include full-color photography advertising circulars of eight to 20 pages distributed through newspaper insertion or, in the case of inadequate newspaper coverage, through direct mail. During fiscal 2010, these circulars were distributed 47 times in ALCO markets. For fiscal 2011, the Company currently intends to distribute these circulars a similar number of times in the ALCO markets. The Company also uses in-store marketing. The Company’s merchandising and marketing teams work together to present the products in an engaging and innovative manner, which is coordinated so that it is consistent with the current print advertisements. The Company regularly changes its banners and in-store promotions, which are advertised throughout the year, to attract consumers to visit the stores, to generate strong customer frequency and to increase average sales per customer. Net marketing and promotion costs represented approximately 1.0%, 0.8% and 0.9% of net sales in fiscal years 2010, 2009 and 2008. Management believes it has developed a comprehensive marketing strategy that will increase customer traffic and same-store sales. The Company continues to operate as a high low retailer and has included in many of its marketing vehicles cross departmental products. For example, the Company has used an Elder Care page with over-the-counter products, “as seen on TV” items, and dry meals—all targeting customers who have reached retirement age. The Company believes that by providing the breadth of these key items to this targeted audience we can serve our customers’ needs more efficiently and garner a greater share of the purchases made by this demographic.

The Company’s ALCO stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, groceries, hardware, health and beauty aids, housewares, jewelry, ladies’, men’s and children’s apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys. The Company’s smaller Duckwall stores offer a more limited selection of similar merchandise. The Company is constantly evaluating the appropriate mix of merchandise to improve sales and gross margin performance. Corporate merchandising is provided to each store to ensure a consistent company-wide store presentation. To facilitate long-term merchandising planning, the Company divides its merchandise into three core categories: primary, secondary, and convenience. The primary core receives management’s primary focus, with a wide assortment of merchandise being placed in the most accessible locations within the stores and receiving significant promotional consideration. The secondary core consists of categories of merchandise for which the Company maintains a strong assortment that is easily and readily identifiable by its customers. The convenience core consists of categories of merchandise for which the Company maintains convenient (but limited) assortments, focusing on key items that are in keeping with customers’ expectations for a broad line retail store. Secondary and convenience cores include merchandise that the Company feels is important to carry, as the target customer expects to find them within a broad line retail store and they ensure a high level of customer traffic. The Company continually evaluates and ranks all product lines, shifting product classifications when necessary to reflect the changing demand for products. In addition, the Company’s merchandising systems are designed to integrate the key retailing functions of seasonal merchandise planning, purchase order management, merchandise distribution, sales information and inventory maintenance and replenishment. All of the Company’s ALCO stores have point-of-service computer terminals that capture sales information and transmit such information to the Company’s data processing facilities where it is used to drive management, financial, and supply chain functions.

Store Expansion. The continued growth of the Company is dependent, in large part, upon the Company’s ability to open and operate new stores on a timely and profitable basis. The Company currently intends to open fewer than 10 ALCO stores in fiscal 2011. While the Company believes that adequate sites are currently available, the rate of new store openings is subject to various contingencies, many of which are beyond the Company’s control. These material contingencies include:

·	the Company’s ability to hire, train, and retain qualified personnel;

·	the availability of adequate capital resources for us to purchase inventory, equipment, and fixtures and make other capital expenditures necessary for store expansion; and

·	the ability of our landlords and developers to find appropriate financing in the current credit market to develop property to be leased by the Company.

Historically, we have been able to hire, train, and retain qualified personnel and we anticipate being able to do so in the future. In order to address this contingency, the Company has initiated an Assistant Manager Training Program whereby the Company provides general management training to manager candidates at monthly seminars held at the Company’s corporate offices. We anticipate that this program will increase our ability to train and retain qualified personnel. We currently believe that we will have the capital resources necessary to purchase the inventory, equipment, and fixtures, and to fund the other capital expenditures necessary for the store expansions. If we lack such capital resources, however, it would limit our expansion plans and negatively impact our operations going forward. The Company has been working closely with multiple developers and landlords that the Company believes have the financial resources to develop property to be leased by the Company and hold such property as a long-term investment in their portfolios. If such developers and landlords do not have, and cannot obtain, the financial resources to develop and hold such property, it would limit our expansion plans and negatively impact our operations going forward.

Recent Events.

·	The Company closed four Duckwall Stores during the first quarter of fiscal 2011. They were located in underperforming markets and were at the end of their lease term.
·		On May 13, 2010, the Company notified Jane F. Gilmartin, Executive Vice President - Chief Operating Officer, that her employment with the Company would terminate effective June 12, 2010.
·		Donny R. Johnson, Executive Vice President - Chief Financial Officer resigned from the Company on July 12, 2010 effective August 13, 2010.
·		Richard E. Wilson, President - Chief Executive Officer was named to the Board of Directors on July 27, 2010.

Key Items in Second Quarter Fiscal 2011.

The Company measures itself against a number of financial metrics to assess its performance. Some of the important financial items during the second quarter of fiscal 2011 were:

·	Net sales decreased 5.5% to $118.2 million. Same-store sales decreased 7.2% compared to the prior year second quarter.
·	Gross margin percentage decreased to 31.8% of sales, compared to 33.9% in the prior year second quarter.
·	Net loss per share was $0.34 in the second quarter of fiscal 2011 compared to net earnings of $0.78 per share in the prior year second quarter.
·	The Company’s earnings from continuing operations before interest, taxes, depreciation and amortization, share-based compensation, preopening store costs and store transformation project costs (“Adjusted EBITDA”) for the second quarter 2011 was $1.7 million compared to the prior year second quarter of $8.8 million.

RESULTS OF OPERATIONS

Thirteen Weeks Ended August 1, 2010 Compared to Thirteen Weeks Ended August 2, 2009

Net Sales

Net sales for the second quarter of fiscal 2011 decreased $6.9 million, or 5.5%, to $118.2 million compared to $125.0 million for the second quarter of fiscal 2010. Same-store sales decreased 7.2% when compared with the prior year same quarter. Company sales were negatively impacted by decreases in apparel, electronics and outdoor living, which were slightly offset by increases in the commodities categories of food and consumables.

Gross Margin

Gross margin for the second quarter of fiscal 2011 decreased $4.7 million, or 11.2%, to $37.6 million compared to $42.3 million in the second quarter of fiscal 2010. Gross margin as a percentage of sales was 31.8% for the second quarter of fiscal 2011, which decreased when compared to 33.9% for the second quarter of fiscal 2010. The decrease in the gross margin percentage was primarily due to lower margin as a result of product mix of $3.0 million and reduced vendor consideration of $505 offset by $1.3 million in lower markdowns.

SG&A

Selling, general and administrative (SG&A) expense increased $1.7 million or 4.9%, to $36.2 million in the second quarter of fiscal 2011 compared to $34.5 million in the second quarter of fiscal 2010. As a percentage of net sales, SG&A expenses for the second quarter of fiscal 2011 were 30.6%, compared to 27.6% for second quarter fiscal 2010. The increase in SG&A expenses is attributable to increased insurance costs of $935, store level labor and benefits of $852 and executive severance of $344 offset by reduced store transformation project costs of $718, floor care services of $318, advertising expense of $132 and accounting fees of $131. Excluding share-based compensation, preopening store costs and store transformation project costs (Adjusted SG&A expenses) were 30.4% and 26.8%, as percentage of net sales, for the second quarter fiscal 2011 and 2010, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $233, or 10.3%, to $2.5 million in the second quarter of fiscal 2011 compared to $2.3 million in the second quarter of fiscal 2010.

Interest Expense

Interest expense increased $200, or 38.4%, to $721 in the second quarter of fiscal 2011 compared to $521 in the second quarter of fiscal 2010. The increase in interest expense is attributable to a higher interest rate charged with the restated credit agreement partially offset by the lower revolver balance.

Income Taxes

The Company’s effective tax rate on earnings from continuing operations before income taxes in the second quarter of fiscal 2011 was 29.5% compared to 39.5% in the second quarter of fiscal 2010. The effective tax rate has decreased as a result of lower projected taxable income for fiscal 2011. Also contributing to the decrease were lower permanent book to tax differences.

Earnings (Loss) from Discontinued Operations

Earnings from discontinued operations, net of income tax expense, was $4 in the second quarter of fiscal 2011, compared to a loss of $14, net of income tax benefit, in the second quarter of fiscal 2010.

Twenty Six Weeks Ended August 1, 2010 Compared to Twenty Six Weeks Ended August 2, 2009

Net Sales

Net sales for the twenty-six week period of fiscal 2011 decreased $9.0 million, or 3.8%, to $231.2 million compared to $240.2 million for the twenty-six week period of fiscal 2010. Same-store sales decreased 5.1% when compared with the prior year same twenty-six week period. Company sales were impacted by decreases in apparel, electronics and hardlines products, which were slightly offset by increases in the commodities categories of food, pet supplies and health care.

Gross Margin

Gross margin for the twenty-six week period of fiscal 2011 decreased $8.0 million, or 9.9%, to $72.8 million compared to $80.8 million in the twenty-six week period of fiscal 2010. Gross margin as a percentage of sales was 31.5% for the twenty-six week period of fiscal 2011, which decreased when compared to 33.6% for the twenty-six week period of fiscal 2010. The decrease in the gross margin percentage was primarily due to lower margin as a result of product mix of $3.6 million and reduced vendor consideration of $1.0 million. Reduced merchandise receipts of certain seasonal and apparel items during the first quarter of fiscal 2011 attributed to the decline in margin due to product mix. The reduced merchandise receipts also resulted in lower vendor consideration.

SG&A

Selling, general and administrative (SG&A) expense increased $918 or 1.3%, to $71.0 million in the twenty-six week period of fiscal 2011 compared to $70.1 million in the twenty-six week period of fiscal 2010. As a percentage of net sales, SG&A expenses for the twenty-six week period of fiscal 2011 were 30.7%, compared to 29.2% for twenty-six week period fiscal 2010. The increase in SG&A expenses is attributable to increased insurance costs of $977, legal fees of $567, executive severance of $481 and advertising costs of $320 offset by reduced store transformation project costs of $2.1 million, reduced floor care services of $347 and accounting fees of $245. Excluding share-based compensation, preopening store costs and store transformation project costs (Adjusted SG&A expenses) were 30.5% and 28.1%, as percentage of net sales, for the twenty-six week period fiscal 2011 and 2010, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $338, or 7.3%, to $5.0 million in the twenty-six week period of fiscal 2011 compared to $4.6 million in the twenty-six week period of fiscal 2010.

Interest Expense

Interest expense increased $338, or 32.0%, to $1.4 million in the twenty-six week period of fiscal 2011 compared to $1.1 million in the twenty-six week period of fiscal 2010. The increase in interest expense is attributable to a higher interest rate charged with the restated credit agreement partially offset by the lower revolver balance.

Income Taxes

The Company’s effective tax rate on earnings from continuing operations before income taxes in the twenty-six week period of fiscal 2011 was 33.5% compared to 39.3% in the twenty-six week period of fiscal 2010. The effective tax rate has decreased as a result of lower projected taxable income for fiscal 2011, which resulted in a lower federal statutory tax rate. Also contributing to the decrease were lower permanent book to tax differences.

Loss from Discontinued Operations

Loss from discontinued operations, net of income tax benefit, was $137 in the twenty-six week period of fiscal 2011, compared to a loss of $29, net of income tax benefit, in the twenty-six week period of fiscal 2010. Four Duckwall stores were closed during the twenty-six week period of fiscal year 2011 while one Duckwall store was closed during the same period of the previous fiscal year.

Certain Non-GAAP Financial Measures

The Company has included Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, non-GAAP performance measures, as part of its disclosure as a means to enhance its communications with stockholders. Certain stockholders have specifically requested this information to assist them in comparing the Company to other retailers that disclose similar non-GAAP performance measures. Further, management utilizes these measures in internal evaluation, review of performance and in comparing Company’s financial measures to those of its peers. Adjusted EBITDA differs from the most comparable GAAP financial measure (earnings (loss) from continuing operations) in that it does not include certain items, as does Adjusted Gross Margin and Adjusted SG&A. These items are excluded by management to better evaluate normalized operational cash flow and expenses excluding unusual, inconsistent and non-cash charges. To compensate for the limitations of evaluating the Company's performance using Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA, management also utilizes GAAP performance measures such as gross margin, return on investment, return on equity and cash flow from operations. As a result, Adjusted Gross Margin, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company’s operations.

	For the Thirteen Week Periods Ended						For the Twenty-Six Week Periods Ended
SG&A Expenses Breakout	August 1, 2010			August 2, 2009			August 1, 2010			August 2, 2009
Store support center (1)	$	5,685			5,599			11,516			12,117
Distribution center		2,395			2,041			4,570			4,232
401K expense		102			86			125			196
Same-store SG&A		27,205			26,534			53,531			53,113
Non same-store SG&A (2)		704			(17	)		1,083			3
Share-based compensation		119			262			200			446
SG&A as reported		36,210			34,505			71,025			70,107
Less:
Share-based compensation		(119	)		(262	)		(200	)		(446	)
Preopening store costs (2)		(183	)		-			(382	)		-
Store transformation project costs (1)		-			(718	)		-			(2,096	)
Adjusted SG&A	$	35,908			33,525			70,443			67,565

Adjusted SG&A as % of sales		30.4	%		26.8	%		30.5	%		28.1	%

Sales per average selling square foot (3)	$	25.97			27.70		$	50.51			53.22

Gross Margin dollars per average selling square feet (3)	$	8.26			9.38		$	15.90			17.90

Adjusted SG&A per average selling square foot (3)	$	7.89			7.43		$	15.39			14.97

Adjusted EBITDA per average selling square foot (3)(4)	$	0.37			1.95		$	0.51			2.93

Average inventory per average selling square feet (3)(5)(6)	$	25.84			28.91		$	26.07			27.47

Average selling square feet (3)		4,550			4,513			4,577			4,513

Total stores operating beginning of period		255			258			258			258
Total stores operating end of period		257			257			257			257
Total stores less than twelve months old								4			3
Total non same-stores								4			3

Supplemental Data:
Same-store gross margin dollar change		(1.5	)%		1.1	%		(1.8	)%		1.3	%
Same-store SG&A dollar change		2.5	%		(3.8	)%		0.8	%		(3.4	)%
Same-store total customer count change		(4.7	)%		(0.6	)%		(3.9	)%		2.4	%
Same-store average sale per ticket change		(2.3	)%		(2.3	)%		(0.9	)%		0.3	%


(1) Store support center includes store transformation project costs for first quarter fiscal 2010
(2) Non same-stores are those stores opened in fiscal 2011 and 2010 which have not reached their fourteenth period of operation
(3) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2
(4) Adjusted EBITDA per selling square foot is calculated as Adjusted EBITDA divided by selling square feet
(5) Average store level merchandise inventory for fiscal 2011 and 2010 is calculated as beginning inventory plus ending inventory divided by 2
(6) Excludes inventory for unopened stores

Fiscal 2011 Compared to Fiscal 2010

Store support center expenses for fiscal 2011 decreased $601, or 5.0%. The decrease was primarily due to reduced store transformation project costs of $2.1 million offset by increased legal expenses of $567, insurance expenses of $524 and executive severance of $481.

Same-store SG&A expenses increased $418, or 0.8%. The increase was primarily due to increased labor and benefits of $667 offset by reduced floor care services of $301.

Non same-store SG&A expenses increased $1.1 million. The Company has opened four stores since the first quarter of fiscal 2010. The Company did not open any new stores in fiscal 2010 until the fourth quarter.

Reconciliation and Explanation of Non-GAAP Financial Measures

The following table shows the reconciliation of Adjusted EBITDA to net earnings (loss) from continuing operations:

			For the Thirteen						Trailing Twelve		For the Thirteen					Trailing Twelve
			Week Periods Ended						Periods Ended		Week Periods Ended					Periods Ended
	Fiscal 2010		May 2, 2010			May 3, 2009			May 2, 2010		August 1, 2010			August 2, 2009		August 1, 2010
Net earnings (loss) from continuing operations (1)	$	3,100		(1,788	)		(36	)		1,348		(1,301	)		3,044		(2,997	)
Plus:
Interest		2,149		674			537			2,286		721			521		2,486
Taxes (1)		2,174		(1,011	)		(33	)		1,196		(545	)		1,985		(1,334	)
Depreciation and amortization (1)		9,982		2,482			2,377			10,087		2,501			2,268		10,320
Share-based compensation		757		81			185			653		119			262		510
Preopening store costs (2)		128		199			-			327		183			-		510
Store transformation project costs		2,096		-			1,378			718		-			718		-
=Adjusted EBITDA (1)(3)(4)(5)		20,386		637			4,408			16,615		1,678			8,798		9,495

Cash		5,164		5,186			8,208			5,186		3,690			5,446		3,690
Debt		40,992		35,606			60,946			35,606		34,018			48,802		34,018
Debt, net of cash	$	35,828		30,420			52,738			30,420		30,328			43,356		30,328

(1) These amounts will not agree with the fiscal year end 2010 or fiscal 2010 first quarter 10-Q filing due to the five stores the Company closed since the second quarter of fiscal 2010. These stores are now shown in discontinued operations.
(2) These costs are not consistent quarter to quarter as the Company does not open the same number of stores in each quarter of each fiscal year. These costs are directly associated with the number of stores that have been or will be opened and are incurred prior to the grand opening of each store.
(3) For the trailing twelve periods ended August 1, 2010 the average open weeks for the Company's two non same-stores was 14 weeks.
(4) The Company implemented new initiatives for fiscal year 2010. The fiscal 2010 initiatives include, but are not limited to, reduced point-of-sale hardware lease expense, energy expense and accident reduction programs. These initiatives achieved approximately $1.4 million in SG&A savings for the twenty-six weeks of fiscal 2010 when compared to the prior year same period.
(5) The store transformation project completed in fiscal 2010 continues to provide SG&A savings in fiscal 2011. This initiative achieved approximately $458 in SG&A savings for the twenty-six weeks of fiscal 2011 when compared to the prior year same period.

LIQUIDITY AND CAPITAL RESOURCES

The Company's primary sources of funds are cash flows from operations and borrowings under its revolving loan credit facility.

At August 1, 2010, working capital (defined as current assets less current liabilities) was $109.8 million compared to $123.2 million at August 2, 2009. The decrease in working capital was primarily attributable to decreased inventory and increased accounts payable.

The Company uses its revolving loan credit facility and vendor trade credit financing (accounts payable) to fund the build-up of inventories periodically during the year for its peak selling seasons and to meet other short-term cash requirements. The revolving loan credit facility provides up to $120 million of financing in the form of notes payable and letters of credit. The loan agreement expires in February 2014. The revolving loan note payable and letter of credit balance at August 1, 2010 was $37.9 million, resulting in an available line of credit at that date of $58.8 million based upon a borrowing base calculation. Loan advances are secured by a security interest in the Company’s inventory and credit card receivables.

The loan agreement contains various restrictions that are applicable when outstanding borrowings exceed $77.5 million, including limitations on additional indebtedness, prepayments, acquisition of assets, granting of liens, certain investments and payments of dividends. The Company's loan agreement contains various covenants including limitations on additional indebtedness and certain financial tests, as well as various subjective acceleration clauses. As of September 9, 2010, the Company believes it is in compliance with all covenants and subjective acceleration clauses of the debt agreements.

The balance sheet classification of the borrowings under the revolving loan credit facility has been determined in accordance with ASC Topic 470-10-45. Accordingly, this obligation has been classified as a long-term liability in the accompanying consolidated balance sheet. Short-term trade credit represents a significant source of financing for inventory to the Company. Trade credit arises from the willingness of the Company's vendors to grant payment terms for inventory purchases.

Cash provided by operating activities in the twenty-six weeks of fiscal 2011 and fiscal 2010 was $9.3 million and $4.8 million, respectively. The increase in the amount of cash provided by operating activities in the twenty-six week period of fiscal 2011 compared to the same period of fiscal 2010 was primarily due to the $11.4 million increase in accounts payable offset by $6.2 million decrease in net earnings. This increase in accounts payable is due to a significant effort by the Company of negotiating extended dating with its vendors.

Cash used in investing activities in the twenty-six weeks of fiscal 2011 and 2010 was $2.9 million and $3.1 million, respectively.

Cash used in financing activities in the twenty-six weeks of fiscal 2011 and 2010 was $7.9 million and $1.0 million, respectively. Net borrowings on the revolving loan declined $5.2 million (including refinancing costs of $1.3 million) during the twenty-six week period ended August 1, 2010 compared to increasing $594 during the same period in the prior fiscal year.

For a discussion of our other contractual obligations, see a discussion of future commitments under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our Form 10-K for the fiscal year ended January 31, 2010. There have been no significant developments with respect to our contractual obligations since January 31, 2010.

As of September 9, 2010, the Company has repurchased 25,534 shares of stock since March 23, 2006. The average price paid was $15.16. Since the fiscal year end January 31, 2010, the Company has not repurchased any shares.

OFF-BALANCE SHEET ARRANGEMENTS

The Company has no off-balance sheet arrangements that affect the Company’s current or future financial condition.

BUSINESS OPERATIONS

The following chart indicates the percentage of sales, excluding fuel sales, represented by each of our major product categories for the thirteen and twenty-six week periods of fiscal 2011 and 2010, respectively:

	For the Thirteen Week Periods Ended						For the Twenty-Six Week Periods Ended
	August 1, 2010			August 2, 2009			August 1, 2010			August 2, 2009
Merchandise Category:
Consumables and commodities		40	%		37	%		41	%		39	%
Hardlines		30	%		32	%		29	%		30	%
Apparel and accessories		16	%		17	%		16	%		16	%
Home furnishings and décor		14	%		14	%		14	%		15	%

Total		100	%		100	%		100	%		100	%

NEW ACCOUNTING PRONOUNCEMENTS

In June 2009, the FASB issued ASU 2009-16, which updated ASC Topic 810, Accounting for Transfers of Financial Assets, which amends the derecognition guidance in former FASB Statement No. 140 and eliminates the exemption from consolidation for qualifying special-purpose entities. The adoption of this guidance did not have an impact on the Company’s financial condition, results of operations or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

INSTRUMENTS ENTERED INTO OTHER THAN FOR TRADING – INTEREST RATE RISK

The Company is exposed to various types of market risk in the normal course of its business, including the impact of interest rate changes. The Company may enter into interest rate swaps to manage its exposure to interest rate changes, and we may employ other risk management strategies, including the use of foreign currency forward contracts. The Company does not currently hold any derivative instruments and would enter into such instruments solely for cash flow hedging purposes and not for trading purposes.

As described under "Management's Discussion and Analysis of Financial Condition and Results of Operations-Liquidity and Capital Resources", the Company has a variable interest rate debt facility that is subject to interest rate risk. The Company uses this facility to meet the short-term needs of its capital improvements and inventory purchases and other operating activities. These obligations expose the Company to variability in interest payments due to changes in interest rates. If interest rates increase, interest expense increases. Conversely, if interest rates decrease, interest expense also decreases. Based on the Company’s current borrowings under its revolving credit facility, if interest rates were to increase 100 basis points on an annual basis interest expense would increase $349.

The Company has and continues to analyze its debt structure in relation to interest rate risk and believes the mix of debt instruments utilized by the Company (revolving line of credit, term loans, capital leases and operating leases) adequately addresses these risk issues. This process of evaluation is continuous and the Company will adjust its debt structure as is appropriate depending on market conditions.

ITEM 4. CONTROLS AND PROCEDURES

(a) Evaluation of Disclosure Controls and Procedures

The Company carried out an evaluation required by the Securities Exchange Act of 1934, as amended (the “1934 Act”), under the supervision and with the participation of our principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the 1934 Act) as of August 1, 2010. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of August 1, 2010, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the 1934 Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during fiscal 2011 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no material pending legal proceedings other than routine litigation incidental to the business to which the Company is a party or to which any property is subject.

ITEM 1A. RISK FACTORS

There have been no material changes to our risk factors as previously disclosed in our Form 10-K for the fiscal year ended January 31, 2010.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

On March 23, 2006, the Board of Directors of the Company authorized the Company to repurchase up to 200,000 shares of Common Stock, of which 25,534 shares had been purchased as of September 9, 2010. On August 13, 2008 the Company announced that it was resuming its stock repurchase program. Since August 13, 2008, 22,197 shares have been repurchased. The following are details of repurchases under this program for the period covered by this report, in accordance with Rule 10b-1 and Rule 10b-18 of the Securities Exchange Act of 1934:

					Total Number		Maximum Number
					of Shares		of Shares
	Total Number Of				Purchased as Part		that May Yet
	Shares		Average Price Paid		of Publicly Announced		Be Purchased Under
Period	Purchased		per Share		Plans or Programs		the Plans or Programs
As of May 2, 2010		25,534	$	15.16		25,534		174,466

Second Quarter:
05/03/10 - 05/30/10		-		-		-		174,466
05/31/10 - 07/04/10		-		-		-		174,466
07/05/10 - 08/01/10		-		-		-		174,466
		-				-		174,466

As of August 1, 2010		25,534	$	15.16		25,534		174,466

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. RESERVED

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See the Exhibit Index immediately following the signature page hereto.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934 the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

DUCKWALL-ALCO STORES, INC.

(Registrant)

/s/ Jon A. Ramsey

Jon A. Ramsey

Vice President – Controller

Signing on behalf of the registrant and as Principal Financial Officer

EXHIBIT INDEX

3.1	Articles of Incorporation of Duckwall-ALCO Stores, Inc., amended as of June 13, 1994 and restated solely for filing with the Securities and Exchange Commission (filed as Exhibit 3.1 to Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein by reference).

3.2	Bylaws of Duckwall-ALCO Stores, Inc. (filed as Exhibit 3.2 to Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2004 and incorporated herein by reference).

4.1	Specimen of Duckwall-ALCO Stores, Inc. Common Stock Certificate. (filed as Exhibit 4.1 to Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 3, 2008 and incorporated herein by reference).

4.2	Reference is made to the Amended and Restated Articles of Incorporation described under 3.1 above and Bylaws described under 3.2 above.

10.1	Employment Agreement dated January 5, 2006 between the Company and Tom L. Canfield, Jr. is incorporated by reference as Exhibit 10.1 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.2	Employment Agreement dated August 1, 2007 between the Company and Donny R. Johnson is incorporated by reference as Exhibit 10.2 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.3	Employment Agreement dated January 5, 2006 between the Company and Jon A. Ramsey is incorporated by reference as Exhibit 10.3 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.4	Addendum to Employment Agreement dated December 31, 2008 between the Company and Tom L. Canfield, Jr. is incorporated by reference as Exhibit 10.4 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.5	Addendum to Employment Agreement dated December 31, 2008 between the Company and Donny R. Johnson is incorporated by reference as Exhibit 10.5 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.6	Addendum to Employment Agreement dated December 31, 2008 between the Company and Jon A. Ramsey is incorporated by reference as Exhibit 10.6 to the Current Report on Form 10-K of the Company dated April 15, 2010.

10.7	Employment Agreement dated December 11, 2009 between the Company and James M. Spencer is incorporated by reference to Exhibit 10.7 to the Current Report on Form 8-K of the Company dated December 17, 2009.

10.8	Separation Agreement and Release, dated as of February 4, 2009, between the Company and Phillip D. Hixon is incorporated by reference to Exhibit 10.8 to the Current Report on Form 8-K of the Company dated February 4, 2009.

10.9	Addendum to Employment Agreement effective as of May 31, 2009 between the Company and Mr. Zigerelli is incorporated by reference to Exhibit 10.9 to the Current Report on Form 8-K of the Company dated June 3, 2009.

10.10	Addendum to Employment Agreement effective as of May 31, 2009 between the Company and Ms. Gilmartin is incorporated by reference to Exhibit 10.10 to the Current Report on Form 8-K of the Company dated June 3, 2009.

10.11	Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements is incorporated by reference to Exhibit 10.11 to the Current Report on Form 8-K of the Company dated January 12, 2010. On December 31, 2009, Royce Winsten, the Chairman of the Board of Directors of the Company, was awarded a special bonus for the amount of $50,000.

10.12	Separation Release, dated as of February 1, 2010, between the Company and James M. Spencer, is incorporated by reference to Exhibit 10.12 to the Current Report on Form 8-K of the Company dated February 1, 2010.

10.13	Amended and Restated Credit Agreement, dated as of February 10, 2010, between the Company and Bank of America, N.A., and Wells Fargo Retail Finance, LLC is incorporated by reference to the Current Report on Form 10-Q of the Company dated June 10, 2010.

10.14	Employment Agreement dated December 11, 2009 between the Company and Richard E. Wilson is incorporated by reference to Exhibit 10.14 to the Current Report on Form 8-K of the Company dated February 25, 2010.

10.15	Resignation of Director. On March 2, 2010 James V. Worth resigned from the Board of Directors is incorporated by reference to Exhibit 10.15 to the Current Report on Form 8-K of the Company dated March 2, 2010.

10.16	Separation Agreement and Release, dated as of March 17, 2010, between the Company and Lawrence J. Zigerelli, is incorporated by reference to Exhibit 10.16 to the Current Report on Form 8-K of the Company dated March 16, 2010.

10.17	Separation Agreement and Release, dated as of May 13, 2010, between the Company and Jane F. Gilmartin, is incorporated by reference to Exhibit 10.17 to the Current Report on Form 8-K of the Company dated May 13, 2010.

31.1	Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc. dated September 9, 2010, pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

31.2	Certification of Principal Financial Officer of Duckwall-ALCO Stores, Inc. dated September 9, 2010, pursuant to Rule 13a-4(a) under the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003.

32.1	Certification of Chief Executive Officer of Duckwall-ALCO Stores, Inc, dated September 9, 2010, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly Report on Form 10-Q for the quarter ended August 1, 2010 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.

32.2	Certification of Principal Financial Officer of Duckwall-ALCO Stores, Inc., dated September 9, 2010, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, which is furnished with this Quarterly Report on Form 10-Q for the quarter ended August 1, 2010 and is not treated as filed in reliance upon § 601(b)(32) of Regulations S-K.

Signature and Title			Date

/s/ Richard E. Wilson			September 9, 2010
Richard E. Wilson
President and Chief Executive Officer
(Principal Executive Officer)

/s/ Jon A. Ramsey			September 9, 2010
Jon A. Ramsey
Vice President – Controller
(Principal Financial and Accounting Officer)

/s/ Raymond A.D. French			September 9, 2010
Raymond A.D. French
Director

/s/ Dennis E. Logue			September 9, 2010
Dennis E. Logue
Director

/s/ Lolan C. Mackey			September 9, 2010
Lolan C. Mackey
Director

/s/ Royce L. Winsten			September 9, 2010
Royce L. Winsten
Director - Chairman of Board

ALCO STORES INC - FORM 10-Q - September 9, 2010

Attached files

ALCO STORES INC Reports