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

Operations. The Company is a multi-regional broad line retailer operating 258 stores in 23 states in the central United States. The thirteen weeks ended May 3, 2009 and May 4, 2008 are referred to herein as the first quarter of fiscal 2010 and 2009, respectively. For purposes of this management's discussion and analysis of financial condition and results of operations, the financial numbers are presented in thousands, except as noted.

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. The Company competes for retail sales with other entities, such as specialty retailers, mass merchandisers, dollar stores and the internet.

The Company is routinely 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 perpetual inventory system to make more fact based decisions.

Recent Events.

ˇ James G. Hyde left the Board of Directors on June 4, 2009.
ˇ James V. Worth was elected to the Board of Directors on June 4, 2009.
ˇ The employment agreement for Larry J. Zigerelli, President - Chief Executive Officer was amended on June 3, 2009.
ˇ The employment agreement for Jane F. Gilmartin, Executive Vice President - Chief Operating Officer was amended on June 3, 2009.

Key Items in First Quarter Fiscal 2010

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 2010 were:

ˇ Net sales increased 9.3% to $115.5 million. Same-store sales increased 6.2% compared to the prior year first quarter.
ˇ Gross margin percentage increased to 33.4% of sales, when compared to 30.0% in the prior year first quarter.
ˇ Net loss per share was $0.01 in the first quarter of fiscal 2010 compared to $1.54 net loss per share in the prior year first quarter.
ˇ The Company's earnings from continuing operations before interest, taxes, depreciation and amortization, share-based compensation, preopening store costs, inventory review initiative and executive, staff severance and store transformation project costs ("Adjusted EBITDA") for the first quarter 2010 was $4.4 million compared to the prior year first quarter of ($1.4) million.

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 has changed its definition of same-stores. The Company had historically included stores as same-store at the beginning of their third fiscal year of operation. In 2010, stores will be included as same-stores beginning in their fourteenth fiscal period of operation. The same-store sales for all Company stores increased 6.2% compared to the prior year first quarter. This new definition resulted in an insignificant difference from the prior definition for the first quarter of 2010.

RESULTS OF OPERATIONS

Thirteen Weeks Ended May 3, 2009 Compared to Thirteen Weeks Ended May 4, 2008.

Net Sales

Net sales for the first quarter of fiscal 2010 increased $9.8 million, or 9.3%, to $115.5 million compared to $105.7 million for the first quarter of fiscal 2009. Same-store sales increased 6.2% when compared with the prior year same quarter.

Gross Margin

Gross margin for the first quarter of fiscal 2010 increased $6.8 million, or 21.5%, to $38.5 million compared to $31.7 million in the first quarter of fiscal 2009. Gross margin as a percentage of sales was 33.4% for the first quarter of fiscal 2010, which increased when compared to 30.0% for the first quarter of fiscal 2009. The increase in the gross margin percentage was primarily due to reduced inventory review initiative charge, markdowns, freight costs and shrink offset by increased LIFO expense. First quarter fiscal 2009 Adjusted Gross Margin as a percentage of sales was 31.3%, excluding the inventory review initiative.

Selling, general and administrative (SG&A) expense decreased $1.1 million or 2.9%, to $35.7 million in the first quarter of fiscal 2010 compared to $36.8 million in the first quarter of fiscal 2009. As a percentage of net sales, selling, general and administrative expenses for the first quarter of fiscal 2010 were 31.0%, compared to 34.8% for first quarter fiscal 2009. The decrease in SG&A expenses is attributable to reduced severance charges of $1.9 million, preopening store costs of $722, point-of-sale hardware lease expense of $465 and floor care services of $230 offset by increased store transformation project costs of $1.4 million and real property rent expense of $1.0 million. Excluding share-based compensation, preopening store costs, store transformation project costs and executive and staff severance (Adjusted SG&A expenses) were 29.6% and 32.6%, as percentage of net sales, for the first quarter fiscal 2010 and 2009, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $604, or 34.1%, to $2.4 million in the first quarter of fiscal 2010 compared to $1.8 million in the first quarter of fiscal 2009.

Interest Expense

Interest expense decreased $68, or 11.2%, to $537 in the first quarter of fiscal 2010 compared to $605 in the first quarter of fiscal 2009.

Income Taxes

The Company's effective tax rate on earnings from continuing operations before income taxes in the first quarter of fiscal 2010 was 45.5% compared to 41.1% in the first quarter of fiscal 2009. The effective tax rate is higher due to the impact of permanent book and tax differences which have remained relatively constant over the reporting periods.

Earnings (loss) from Discontinued Operations

Income from discontinued operations, net of income tax expense, was $4 in the first quarter of fiscal 2010, compared to loss of $1.5 million, net of income tax benefit in the first quarter of fiscal 2009. Three Duckwall stores closed during fiscal year 2009 and were replaced by an ALCO store are shown in continuing operations. In addition, 14 ALCO stores were closed in the first quarter of fiscal 2009. No stores were closed during the first quarter of fiscal 2010.

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 as a means of 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 to compare the Company's financial measures to that of its peers. Adjusted EBITDA differs from the most comparable GAAP financial measure (earnings from continuing operations before discontinued 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 free cash flow. 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
SG&A Expenses Breakout                                         May 3, 2009           May 4, 2008
Store support center (1)                                       $     6,519                 8,049
Distribution center                                                  2,191                 2,337
401K expense                                                           110                   125
Same-store SG&A                                                     24,728                25,480
Non same-store SG&A (2)                                              2,004                 1,131
Share-based compensation                                               185                  (329 )
Final SG&A as reported                                              35,737                36,793
Less:
Share-based compensation                                              (185 )                 329
Preopening store costs (2)                                               -                  (722 )
Executive and staff severance (1)                                        -                (1,942 )
Store transformation project costs (1)                              (1,378 )                   -
Adjusted SG&A                                                  $    34,174                34,458

Adjusted SG&A as % of sales                                           29.6 %                32.6 %

Sales per average selling square foot (3)                      $     25.45                 24.75

Adjusted Gross Margin dollars per average selling square
feet (3)(4)                                                    $      8.50                  7.75

Adjusted SG&A per average selling square foot (3)              $      7.54                  8.07

Adjusted EBITDA per average selling square foot (3)(5)         $      0.96                 (0.32 )

Average inventory per average selling square feet (3)(6)(7)    $     28.73                 27.49

Average selling square feet (3)                                      4,537                 4,270

Total stores operating beginning of period                             258                   262
Total stores operating end of period                                   258                   251
Total stores less than twelve months old                                 9
Total non same-stores                                                   11

Supplemental Data:
Same-store gross margin dollar change                                  9.9 %                (0.5 )%
Same-store SG&A dollar change                                         (3.0 )%                3.8 %
Same-store total customer count change                                 1.6 %                (3.9 )%
Same-store average sale per ticket change                              2.9 %                 2.2 %


(1) Store support center includes executive and staff
severance in first quarter fiscal 2009 and store
transformation project costs for first quarter fiscal 2010.

Fiscal 2010 Compared to Fiscal 2009

Store support center expenses for fiscal 2010 decreased $1.5 million, or 19.0%. The decrease was primarily due to reduced severance costs of $1.9 million, health insurance costs of $286, accounting fees of $251 and market research fees of $244 offset by store transformation project costs of $1.4 million.

Same-store SG&A expenses decreased $752, or 3.0%. The decrease was primarily due to reduced point-of-sale hardware lease expense of $465, labor expenses of $464, floor care services of $229, health insurance expenses of $175 and advertising expenses of $107 offset by increased real property rent expense of $374.

Non same-store SG&A expenses increased $873, or 77.2%. The Company has opened 9 stores since the first quarter of fiscal 2009.

Reconciliation and Explanation of Non-GAAP Financial Measures

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

Adjusted EBITDA from net earnings (loss) from
continuing operations:
                                                                                     Trailing
                                                                                      Twelve
                                                          For the Thirteen Week       Periods
                                                              Periods Ended            Ended
                                            Fiscal        May 3,        May 4,        May 3,
                                             2009          2009          2008          2009
Net earnings (loss) from continuing
operations (1)                             $  (3,021 )         (54 )      (4,381 )       1,306
Plus:
Interest                                       1,867           537           605         1,799
Taxes (1)                                     (2,090 )         (45 )      (3,054 )         919
Depreciation and amortization (1)              9,302         2,377         1,773         9,906
Share-based compensation                         186           185          (329 )         700
Preopening store costs (2)                     1,846             -           722         1,124
Inventory review initiative                    1,345             -         1,345             -
Executive and staff severance                  1,942             -         1,942             -
Store transformation project costs             2,220         1,378             -         3,598
=Adjusted EBITDA (1)(3)(4)(5)                 13,597         4,378        (1,377 )      19,352

Adjusted EBITDA
Same-stores                                   44,090        11,526         7,132        48,484
Non same-stores (3)                            2,216           294            60         2,450
Store support center                         (23,054 )      (5,251 )      (6,232 )     (22,073 )
Warehouse                                     (9,655 )      (2,191 )      (2,337 )      (9,509 )
Reconciled Adjusted EBITDA (1)(3)(4)(5)       13,597         4,378        (1,377 )      19,352

Cash                                           4,744         8,208         4,977         8,208
Debt                                          49,841        60,946        41,080        60,946
Debt, net of cash                          $  45,097        52,738        36,103        52,738

(1) These amounts will not agree with the fiscal 2009 first quarter 10-Q filing due to the one store the Company closed in the third quarter of fiscal 2009. This store is 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 or will be opened and are incurred prior to the grand opening of each store.
(3) For the trailing twelve periods ended May 3, 2009 the average open weeks for the Company's 11 non same-stores is 46 weeks.
(4) During fiscal year 2009, the Company made a change in its Executive Management team and Board of Directors resulting in several initiatives to reduce certain SG&A expenses. For the trailing twelve periods ended May 3, 2009, these initiatives resulted in approximately $8.5 million reduced SG&A expenses when compared to the same prior year trailing twelve periods. The initiatives include, but are not limited to, executive and staff reduction, reduced ALCO same-store hourly wages, advertising expenses, net of coop offset and floor care services along with reduced total Company insurance and travel expenses.
(5) In addition to continued efforts regarding the fiscal 2009 SG&A initiatives, the Company has 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 $734 in reduced SG&A savings for the first quarter of fiscal 2010 when compared to the prior year same period.

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

At May 3, 2009, working capital (defined as current assets less current liabilities) was $132.3 million compared to $109.6 million at May 4, 2008. The increase in working capital was primarily attributable to increased inventory.

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 $105 million of financing in the form of notes payable and letters of credit. The loan agreement expires in January 2011. The revolving loan note payable and letter of credit balance at May 3, 2009 was $59.5 million, resulting in an available line of credit at that date of $45.5 million, subject to 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 June 11, 2009, 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 Emerging Issues Task Force of the Financial Accounting Board as set forth in EITF Issue 95- 22, Balance Sheet Classification of Borrowings Outstanding under Revolving Credit Agreements that Include both a Subjective Acceleration Clause and a Lock-Box Arrangement. 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 used in operating activities in the first quarter of fiscal 2010 and 2009 was $7.0 million and $6.4 million, respectively. The increase in the amount of cash used in operating activities in the first quarter of fiscal 2010 compared to the first quarter of fiscal 2009 was primarily due to an increase in inventory offset by increased accounts payable.

Cash used in acquisition of property and equipment in the first quarter of fiscal 2010 and 2009 was $595 and $2.2 million, respectively.

Cash provided by financing activities in the first quarter of fiscal 2010 and 2009 was $11.1 million and $8.1 million, respectively. Net borrowings on the revolving loan generated $11.9 million during the first quarter ended May 3, 2009 compared to $9.0 million during the first quarter of 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 February 1, 2009. There have been no significant developments with respect to our contractual obligations since February 1, 2009.

As of June 11, 2009, the Company has repurchased 22,197 shares of stock since August 13, 2008. The average price paid was $12.86. Since the fiscal year end February 1, 2009, 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 first quarters of
fiscal 2010 and 2009:


                                                                     For the Thirteen Weeks
                                                                              Ended
                                                               May 3, 2009           May 4, 2008
Merchandise Category:
Consumables and commodities                                              32 %                   33 %
Electronics, entertainment, sporting goods, toys and outdoor
living                                                                   25 %                   25 %
Apparel and accessories                                                  16 %                   19 %
Home furnishings and décor                                               16 %                   13 %
Other                                                                    11 %                   10 %

Total                                                                   100 %                  100 %

In April 2008, the FASB issued FASB Staff Position ("FSP") No. FAS 142-3, "Determination of the Useful Life of Intangible Assets", which amends the factors that must be considered in developing renewal or extension assumptions used to determine the useful life over which to amortize the cost of a recognized intangible asset under SFAS 142, "Goodwill and Other Intangible Assets." The FSP requires an entity to consider its own assumptions about renewal or extension of the term of the arrangement, consistent with its expected use of the asset, and is an attempt to improve consistency between the useful life of a recognized intangible asset under SFAS 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS 141, "Business Combinations." The FSP is effective for fiscal years beginning after December 15, 2008, and the guidance for determining the useful life of a recognized intangible asset must be applied prospectively to intangible assets acquired after the effective date. The FSP is not expected to have a significant impact on our financial condition, results of operations or cash flows.

In May 2008, the FASB issued SFAS No. 162 ("SFAS 162"), "The Hierarchy of Generally Accepted Accounting Principles." The statement is intended to improve financial reporting by identifying a consistent hierarchy for selecting accounting principles to be used in preparing financial statements that are prepared in conformance with generally accepted accounting principles. The statement is effective 60 days following the SEC's pending approval of the Public Company Accounting Oversight Board (PCAOB) amendments to AU Section 411, "The Meaning of Present Fairly in Conformity with GAAP," and is not expected to have any impact on the Company's financial condition, results of operations or cash flows.

In April 2009, the FASB released FSP FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1"). FSP FAS 107-1 extends the disclosure requirements of FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments, to interim financial statements of publicly traded companies as defined in APB Opinion No. 28, Interim Financial Reporting. FSP FAS 107-1 is effective for interim reporting periods ending after June 15, 2009 and is not expected to have a significant impact on our financial condition, results of operations or cash flow.

In April 2009, the FASB issued FSP No. FAS 141 (R)-1, "Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies" ("FSP FAS 141 (R)-1"). FSP FAS 141 (R)-1 amends and clarifies FASB No. 141 (revised 2007), "Business Combinations", to address application . . .