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 257 stores in 23 states in the central United States. The thirteen weeks ended August 2, 2009 and August 3, 2008 are referred to herein as the second 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. The Company completed its store transformation project during June 2009. The actual store level labor and benefit savings and shrink improvement are consistent with expectations.

Key Items in Second 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 second quarter of fiscal 2010 were:

· Net sales decreased 3.0% to $125.3 million. Same-store sales decreased 3.0% compared to the prior year second quarter.
· Gross margin percentage increased to 33.8% of sales, compared to 33.5% in the prior year second quarter.
· Net earnings per diluted share was $0.78 in the second quarter of fiscal 2010 compared to net earnings of $0.85 per diluted 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, inventory review initiative and executive, staff severance and store transformation project costs ("Adjusted EBITDA") for the second quarter 2010 was $8.8 million compared to the prior year second quarter of $9.2 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 decreased 3.0% compared to the prior year second quarter. This new definition resulted in an insignificant difference from the prior definition for the second quarter of 2010.

RESULTS OF OPERATIONS

Thirteen Weeks Ended August 2, 2009 Compared to Thirteen Weeks Ended August 3, 2008

Net Sales

Net sales for the second quarter of fiscal 2010 decreased $3.9 million, or 3.0%, to $125.3 million compared to $129.2 million for the second quarter of fiscal 2009. Same-store sales decreased 3.0% when compared with the prior year same quarter.

Gross Margin

Gross margin for the second quarter of fiscal 2010 decreased $907, or 2.1%, to $42.4 million compared to $43.3 million in the second quarter of fiscal 2009. Gross margin as a percentage of sales was 33.8% for the second quarter of fiscal 2010, which increased when compared to 33.5% for the second quarter of fiscal 2009. The increase in the gross margin percentage was primarily due to reduced markdowns, shrink and freight costs offset by reduced vendor consideration.

SG&A

Selling, general and administrative (SG&A) expense decreased $441 or 1.3%, to $34.6 million in the second quarter of fiscal 2010 compared to $35.1 million in the second quarter of fiscal 2009. As a percentage of net sales, selling, general and administrative expenses for the second quarter of fiscal 2010 were 27.6%, compared to 27.1% for second quarter fiscal 2009. The decrease in SG&A expenses is attributable to reduced store level labor and benefits of $1.4 million, preopening store costs of $773 and point-of-sale hardware lease expense of $481 offset by increased advertising expense of $791, store transformation project costs of $718 and real property rent expense of $344. Excluding share-based compensation, preopening store costs, store transformation project costs and executive and staff severance (Adjusted SG&A expenses) were 26.8% and 26.4%, as percentage of net sales, for the second quarter fiscal 2010 and 2009, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $364, or 19.1%, to $2.3 million in the second quarter of fiscal 2010 compared to $1.9 million in the second quarter of fiscal 2009.

Interest Expense

Interest expense decreased $30, or 5.4%, to $521 in the second quarter of fiscal 2010 compared to $551 in the second quarter of fiscal 2009.

Income Taxes

The Company's effective tax rate on earnings from continuing operations before income taxes in the second quarter of fiscal 2010 was 39.5% compared to 40.7% in the second quarter of fiscal 2009. The effective tax rate is lower due to the impact of increased federal tax credit differences, as well as, the decreased of the federal statutory rate from 35% to 34%.

Loss from Discontinued Operations

Loss from discontinued operations, net of income tax benefit, was $0 in the second quarter of fiscal 2010, compared to loss of $188, net of income tax benefit in the second quarter of fiscal 2009. Three Duckwall stores that were 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. One Duckwall store was closed during the second quarter of fiscal 2010.

Twenty-six Weeks Ended August 2, 2009 Compared to Twenty-six Weeks Ended August 3, 2008

Net Sales

Net sales for the twenty-six week period of fiscal 2010 increased $5.9 million, or 2.5%, to $240.7 million compared to $234.8 million for the twenty-six week period of fiscal 2009. Same-store sales increased 1.2% when compared with the prior year.

Gross Margin

Gross margin for the twenty-six week period of fiscal 2010 increased $5.9 million, or 7.9%, to $80.9 million compared to $75.0 million in the twenty-six week period of fiscal 2009. Gross margin as a percentage of sales was 33.6% for the twenty-six week period of fiscal 2010, which increased when compared to 32.0% for the twenty-six week period of fiscal 2009. The increase in the gross margin percentage was primarily due to reduced markdowns, freight costs and shrink offset by reduced vendor consideration. The twenty-six week period of fiscal 2009 Adjusted Gross Margin as a percentage of sales was 32.5%, excluding the impact of the inventory review initiative.

SG&A

Selling, general and administrative (SG&A) expense decreased $1.5 million or 2.1%, to $70.3 million in the twenty-six week period of fiscal 2010 compared to $71.8 million in the twenty-six week period of fiscal 2009. As a percentage of net sales, selling, general and administrative expenses for the twenty-six week period of fiscal 2010 were 29.2%, compared to 30.6% for twenty-six week period fiscal 2009. The decrease in SG&A expenses is attributable to reduced severance charges of $1.9 million, preopening store costs of $1.5 million, store level wages and benefits of $1.1 million and point-of-sale hardware lease expense of $947 offset by increased store transformation project costs of $2.1 million, real property rent expense of $1.3 million and advertising expenses of $612. Excluding share-based compensation, preopening store costs, store transformation project costs and executive and staff severance (Adjusted SG&A expenses) were 28.2% and 29.2%, as percentage of net sales, for the twenty-six week periods of fiscal 2010 and 2009, respectively.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $970, or 26.4%, to $4.6 million in the twenty-six week period of fiscal 2010 compared to $3.7 million in the twenty-six week period of fiscal 2009.

Interest Expense

Interest expense decreased $99, or 8.6%, to $1.1 million in the twenty-six week period of fiscal 2010 compared to $1.2 million in the twenty-six week period of fiscal 2009.

Income Taxes

The Company's effective tax rate on earnings from continuing operations before income taxes in the twenty-six week period of fiscal 2010 was 39.4% compared to 42.5% in the twenty-six week period of fiscal 2009. The effective tax rate is lower due to the impact of increased federal tax credit differences, as well as, the decrease of the federal statutory rate from 35% to 34%.

Loss from Discontinued Operations

Loss from discontinued operations, net of income tax benefit, was $2 in the twenty-six week period of fiscal 2010, compared to loss of $1.7 million, net of income tax benefit in the twenty-six week period of fiscal 2009. Three Duckwall stores that were 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 twenty-six week period of fiscal 2009. One Duckwall store was closed during the twenty-six week period 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 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 to compare the Company's financial measures to those 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         For the Twenty-Six Week Periods
                                                         Ended                                  Ended
                                            August 2,             August 3,        August 2,             August 3,
SG&A Expenses Breakout                        2009                  2008             2009                  2008
Store support center (1)                   $     5,599                 4,719           12,117                12,768
Distribution center                              2,041                 2,241            4,232                 4,578
401K expense                                        86                   119              196                   244
Same-store SG&A                                 25,414                26,417           50,116                51,870
Non same-store SG&A (2)                          1,213                 1,365            3,218                 2,496
Share-based compensation                           261                   194              446                  (135 )
SG&A as reported                                34,614                35,055           70,325                71,821
Less:
Share-based compensation                          (261 )                (194 )           (446 )                 135
Preopening store costs (2)                           -                  (773 )              -                (1,495 )
Executive and staff severance (1)                    -                     -                -                (1,942 )
Store transformation project costs (1)            (718 )                   -           (2,096 )                   -
Adjusted SG&A                              $    33,635                34,088           67,783                68,519

Adjusted SG&A as % of sales                       26.8 %                26.4 %           28.2 %                29.2 %

Sales per average selling square foot
(3)                                        $     27.65                 29.47            53.11                 54.24

Adjusted Gross Margin dollars per
average selling square feet (3)(4)         $      9.36                  9.88            17.86                 17.65

Adjusted SG&A per average selling square
foot (3)                                   $      7.42                  7.78            14.96                 15.83

Adjusted EBITDA per average selling
square foot (3)(5)                         $      1.94                  2.10             2.90                  1.82

Average inventory per average selling
square feet (3)(6)(7)                      $     28.55                 28.03            27.11                 26.44

Average selling square feet (3)                  4,532                 4,383            4,532                 4,329

Total stores operating beginning of
period                                             258                   251              258                   262
Total stores operating end of period               257                   257              257                   257
Total stores less than twelve months old                                                    3
Total non same-stores                                                                       3

Supplemental Data:
Same-store gross margin dollar change              3.9 %                 2.6 %            6.7 %                 1.2 %
Same-store SG&A dollar change                     (3.8 )%                5.0 %           (3.4 )%                4.4 %
Same-store total customer count change            (2.3 )%               (2.7 )%          (0.5 )%               (3.3 )%
Same-store average sale per ticket
change                                            (2.3 )%                6.8 %            0.1 %                 4.6 %

(1) Includes executive and staff severance for first quarter fiscal 2009 and store transformation project costs for first quarter fiscal 2010
(2) Non same-stores are those stores opened in Fiscal 2009 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 Gross Margin includes $1.3 million inventory review initiative charge added back in first quarter fiscal 2009
(5) Adjusted EBITDA per selling square foot is calculated as Adjusted EBITDA divided by selling square feet
(6) Average store level merchandise inventory for fiscal 2010 and 2009 is calculated as beginning inventory plus ending inventory divided by 2
(7) Excludes inventory for unopened stores

Fiscal 2010 Compared to Fiscal 2009

Store support center expenses for fiscal 2010 decreased $651, or 5.1%. The decrease was primarily due to reduced severance costs of $1.9 million, health insurance costs of $348, market research fees of $244 and accounting fees of $180 offset by store transformation project costs of $2.1 million.

Same-store SG&A expenses decreased $1.8 million, or 3.4%. The decrease was primarily due to reduced labor expenses of $1.2 million, point-of-sale hardware lease expense of $947 and benefits expense of $675, offset by increased real property rent expense of $480 and advertising expense of $465.

Non same-store SG&A expenses increased $722, or 28.9%. The Company has opened three stores since the second quarter of fiscal 2009.

Reconciliation and Explanation of Non-GAAP Financial Measures

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

                                                                           Trailing                                               Trailing
                                                                            Twelve                                                 Twelve
                                         For the Thirteen Week             Periods              For the Thirteen Week             Periods
                                             Periods Ended                  Ended                   Periods Ended                  Ended
                     Fiscal              May 3,        May 4,               May 3,             August 2,     August 3,           August 2,
                      2009                2009          2008                 2009                2009          2008                 2009
Net earnings
(loss) from
continuing
operations (1)      $  (2,996 )               (43 )      (4,367 )              1,328               3,031         3,444                  915
Plus:
Interest                1,867                 537           605                1,799                 521           551                1,769
Taxes (1)              (2,090 )               (45 )      (3,054 )                919               1,977         2,364                  532
Depreciation
and
amortization
(1)                     9,302               2,377         1,773                9,906               2,268         1,904               10,270
Share-based
compensation              186                 185          (329 )                700                 261           194                  767
Preopening
store costs
(2)                     1,846                   -           722                1,124                   -           773                  351
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                 718             -                4,316
=Adjusted
EBITDA
(1)(3)(4)(5)           13,622               4,389        (1,363 )             19,374               8,776         9,230               18,920


Cash                    4,744               8,208         4,977                8,208               5,446         4,653                5,446
Debt                   49,841              60,946        41,080               60,946              48,802        36,964               48,802
Debt, net of
cash                $  45,097              52,738        36,103               52,738              43,356        32,311               43,356

(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. These amounts will not agree with the fiscal year end 2009 or fiscal 2010 first quarter 10-Q filing due to the one store the Company closed in 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 or will be opened and are incurred prior to the grand opening of each store.
(3) For the trailing twelve periods ended August 2, 2009 the average open weeks for the Company's three non same-stores is 49 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 August 2, 2009, these initiatives resulted in approximately $5.9 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 cost reduction initiatives, the Company has also 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 reduced SG&A savings for the twenty-six weeks 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 August 2, 2009, working capital (defined as current assets less current liabilities) was $123.2 million compared to $107.9 million at August 3, 2008. The increase in working capital was primarily attributable to increased inventory and decreased 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 $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 August 2, 2009 was $50.0 million, resulting in an available line of credit at that date of $54.5 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 September 10, 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 (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 provided by operating activities in the twenty-six week periods of fiscal 2010 and 2009 was $4.8 million and $18, respectively. The increase in the amount of cash provided by operating activities in the twenty-six week period of fiscal 2010 compared to the twenty-six week period of fiscal 2009 was primarily due to $5.6 million in increased net earnings.

Cash used in acquisition of property and equipment in the twenty-six week periods of fiscal 2010 and 2009 was $3.1 million and $4.9 million, respectively.

Cash (used in) provided by financing activities in the twenty-six week periods of fiscal 2010 and 2009 was $(1.0) million and $4.0 million, respectively. Net borrowings on the revolving loan generated $594 during the twenty-six week period ended August 2, 2009 compared to $5.5 million 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 . . .