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ALCS > SEC Filings for ALCS > Form 10-K on 5-May-2014All Recent SEC Filings

Show all filings for ALCO STORES INC

Form 10-K for ALCO STORES INC


5-May-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

Economic conditions: The lingering 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. The continuing economic recession has impacted the Company's customers, whom the Company believes to be primarily on a fixed or low income, and has negatively affected their ability to shop in our stores and buy our products. 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. In addition, we cannot predict how current or worsening economic conditions will affect our critical suppliers and distributors and any negative impact on our critical suppliers or distributors may also have an adverse impact on our business results or financial condition.

The economic slowdown also affects the Company's business environment. Due to lower discretionary spending by consumers and a high demand for lower cost goods, the discount retail industry has become highly competitive. This competitive environment impacts the Company because lower prices and greater markdowns on inventory are necessary to keep the Company's position in the industry and these factors may result in lower margins and profitability.

Another factor that continues to impact the Company is severe weather. We have experienced severe weather conditions, including snow and ice storms, flood and wind damage, tornadoes and droughts in some states that have slowed consumer confidence and customer traffic.

Operations. The Company is a regional broad line retailer operating in 23 states.

The Company's fiscal year ends on the Sunday closest to January 31. Fiscal years 2014 and 2013 consisted of 52 weeks and 53 weeks, respectively. 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 believes that co-locating near or next to grocery stores provides a positive overall impact to the results of the ALCO stores. The Company also competes for retail sales with other entities, such as mail order companies, specialty retailers, stores, manufacturer's outlets and the internet. The Company initiated a transactional web site during November 2011. In July 2012, the Company expanded the product selection on its website which now includes more than 20,000 items of high-quality merchandise. Products offered on the ALCOstores.com website include video games and electronics, housewares, appliances and furniture, health & beauty aids, baby goods, office supplies, automotive and sporting goods, and much more. As in traditional ALCO stores, consumers can choose from a wide range of well-known brand names. In addition, the website includes brands not found in the Company's retail stores.

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 2014, these circulars were distributed 47 times in ALCO markets. During fiscal 2015, the Company will distribute approximately 47 circulars in the Company's 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 the stores, to generate strong customer frequency and to increase average sales per customer. Net marketing and promotion costs represented approximately 1.6% and 1.1% of net sales in fiscal years 2014 and 2013, respectively. Management believes it has developed a comprehensive marketing strategy, intended to 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 stores offer a broad line of merchandise consisting of approximately 35,000 items, including automotive, consumables and commodities, crafts, domestics, electronics, furniture, hardware, health and beauty aids, housewares, jewelry, ladies', men's and children's apparel and shoes, pre-recorded music and video, sporting goods, seasonal items, stationery and toys. The Company 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 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.


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Recent Events.

On April 17, 2014, Tom L. Canfield, Jr. resigned from his position as Senior Vice President-Logistics and Administration of the Company, effective May 31, 2014.

On April 22, 2014, the Board of Directors of the Company unanimously resolved to set the date of the 2014 annual meeting of the Company's stockholders as Wednesday, July 30, 2014 and determined that the close of business on June 25, 2014 is to be fixed as the record date for the determination of stockholders entitled to notice and to vote at such annual meeting.

Key Financial Items in Fiscal 2014.

The Company measures itself against a number of financial metrics to assess its performance. Some of the important financial items, from continuing operations, during fiscal 2014 were:

Net sales from continuing operations during the 52 weeks of fiscal 2014 decreased 1.6% to $474.1 million, compared to net sales during the 53 weeks of fiscal 2013 of $481.8 million. Excluding the 53rd week of fiscal 2013, net sales from continuing operations during fiscal 2014 decreased 0.3%, compared to net sales during the 52 weeks of fiscal 2013 of $475.4 million. During fiscal 2014, the Company opened three ALCO stores and closed eight stores. The Company also initiated the closing of fourteen additional stores, which closing will be completed in the first quarter of fiscal 2015.

Gross margin percentage is a key measure of the Company's ability to maximize profit on the purchase and subsequent sale of merchandise, while minimizing promotional and clearance markdowns, shrinkage, damage and returns. Gross margin percentage is defined as net sales less cost of sales, expressed as a percentage of net sales.

Gross margin, as a percentage of net sales, was 28.6% during fiscal 2014, compared to 30.3% during fiscal 2013.

Selling, general and administrative expenses ("SG&A") are a measure of the Company's ability to manage and control its expenses to purchase, distribute and sell merchandise.

SG&A expenses were 29.7% of sales during fiscal 2014 compared to 27.3% during fiscal 2013. Included in fiscal 2014 SG&A are costs associated with the Company's merger activity in the amount of $2.4M and costs associated with the relocation of the corporate office to Coppell, TX in the amount of $1.1M.

During fiscal 2014, the Company recorded a non-cash charge of $9.8 million attributable to a valuation allowance on the Company's cumulative net deferred tax asset. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from utilizing its loss carryforwards in the future.

Earnings per share ("EPS") is an indicator of the returns generated for the Company's stockholders.

Net loss per diluted share for fiscal 2014 was $8.11, compared to net income per diluted share of $0.36 during fiscal 2013.

Return on average equity ("ROE") is a measure of the operating results produced on the average equity of the Company.

Negative ROE was 34.7% during fiscal 2014, compared to ROE of 1.0% for fiscal 2013.


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Results of Operations. The following table sets forth, for the fiscal years indicated, the components of the Company's statements of operations expressed as a percentage of net sales:

                                                              Fiscal Year Ended
                                                         52 Weeks           53 Weeks
                                                        February 2,        February 3,
                                                           2014               2013
Net sales                                                      100.0 %            100.0 %
Cost of sales                                                   71.4               69.7
Gross margin                                                    28.6               30.3
Selling, general and administrative                             29.7               27.3
Depreciation and amortization                                    2.2                1.8
Total operating expenses                                        31.9               29.1
Operating income (loss) from continuing operations              (3.3 )              1.2
Interest expense                                                 0.8                0.7
Earnings (loss) from continuing operations before
income taxes                                                    (4.1 )              0.5
Income tax expense                                               1.1                0.1
Earnings (loss) from continuing operations                      (5.2 )              0.4
Loss from discontinued operations, net of income tax
benefits                                                        (0.4               (0.2 )
Net earnings (loss)                                             (5.6 )%             0.2 %


______________________________________

Fiscal 2014 Compared to Fiscal 2013

Net sales from continuing operations, including the Company's transactional website, during the 52 weeks of fiscal 2014 decreased 1.6% to $474.1 million, compared to net sales during the 53 weeks of fiscal 2013 of $481.8 million. Excluding the 53rd week of fiscal 2013, net sales from continuing operations during fiscal 2014 decreased 0.3%, compared to net sales during the 52 weeks of fiscal 2013 of $475.4 million. During fiscal 2014, the Company opened three ALCO stores and closed eight stores. The Company also initiated the closing of fourteen additional stores, which closing will be completed in the first quarter of fiscal 2015.

Net sales from same-stores, excluding the Company's two fuel center locations, during the 52 weeks of fiscal 2014 decreased 4.5%, or $21.5 million, compared to net sales during the 53 weeks of fiscal 2013. Excluding the 53rd week of fiscal 2013, net sales from same-stores during fiscal 2014 decreased 3.2%, or $15.2 million. The decrease in same-store sales was primarily due to a 7.4% decrease in customer transactions occurring at a same-store and partially offset by a 3.0% increase in the average sale per customer transaction occurring at a same-store.

Net sales from non-same stores during the 52 weeks of fiscal 2014 increased $15.2 million and net sales from the Company's two fuel center locations during the 52 weeks of fiscal 2014 decreased $1.4 million. Excluding the 53rd week of fiscal 2013, net sales from non-same stores during the 52 weeks of fiscal 2014 increased $15.4 million and net sales from the Company's two fuel center locations during the 52 weeks of fiscal 2014 decreased $1.3 million.

Net sales from the Company's transactional website during the 52 weeks of fiscal 2014 were $0.3 million, an increase of $0.1 million compared to the 53 weeks of fiscal 2013. The increase was primarily attributable to the expanded product selection that includes more than 20,000 items of high-quality merchandise

Gross margin from continuing operations for fiscal 2014 decreased $10.3 million, or 1.7%, to $135.8 million compared to $146.1 million in fiscal 2013. As a percentage of net sales, gross margin was 28.6% during fiscal 2014, compared to 30.3% during fiscal 2013. During the third quarter of fiscal 2014 and concluding within the fourth quarter of fiscal 2014, the Company initiated an inventory reduction strategy which allowed the Company to end fiscal 2014 with approximately $4.0 million less inventory, compared to fiscal 2013. The inventory reduction strategy negatively impacted gross margin during the third and fourth quarters of fiscal 2014.

Selling, general and administrative expenses (SG&A) increased $9.7 million, or 7.4%, to $141.0 million during the 52 weeks of fiscal 2014 compared to $131.3 million during the 53 weeks of fiscal 2013. The increase is primarily attributable to SG&A associated with merger activity ($2.4 million) and the relocation of the Company's corporate office ($1.1 million), SG&A from new stores ($2.5 million), increase in net advertising costs ($2.0 million), increase in utilities due to prolonged winter conditions ($1.0 million), and an increase in corporate overhead ($1.3 million); partially offset by a decrease in warehouse overhead ($0.6 million). As a percentage of net sales, SG&A expenses were 29.7% during fiscal 2014, as compared to 27.2% during fiscal 2013. Excluding share-based compensation and loss on sale of assets, fiscal years 2014 and 2013 SG&A expenses, as a percent of net sales, were 29.7% and 27.1%, respectively.

Depreciation and amortization expense from continuing operations increased $1.7 million, or 19.2%, to $10.4 million in fiscal 2014 compared to $8.7 million in fiscal 2013. The increase in depreciation is primarily attributable to the impairment of previously announced store closures ($1.4 million) not finalized during fiscal 2014 and depreciation attributable to new stores.

Operating results from continuing operations decreased $26.4 million to a net operating loss of $24.5 million in fiscal 2014 compared to net income of $1.9 million in fiscal 2013. Operating results from continuing operations as a percentage of net sales was a loss of 5.2% for fiscal 2014 compared to operating income of 0.4% for fiscal 2013.

Interest expense increased $0.4 million, or 10.3%, to $3.8 million in fiscal 2014 compared to $3.5 million in fiscal 2013. Excluding interest on capital lease obligations and amortization of debt financing costs, interest expense was $2.4 million in fiscal 2014 compared to $2.1 million in fiscal 2013.

Income tax expense on continuing operations was $5.0 million in fiscal 2014 compared to $0.6 million in fiscal 2013. Included in fiscal 2014 is a non-cash charge of $9.8 million attributable to a valuation allowance on the Company's cumulative net deferred tax asset. The establishment of a valuation allowance does not have any impact on cash, nor does such an allowance preclude the Company from utilizing its loss carryforwards in the future. The Company's effective tax rate was -23.5% in fiscal 2014 and 19.2% in fiscal 2013.


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Loss from discontinued operations, was $1.9 million in fiscal 2014, compared to $0.6 million in fiscal 2013. Loss from discontinued operations for fiscal 2013 was net of income tax benefit of $0.4 million. Eight stores were closed during fiscal 2014, whereas four stores were closed during fiscal 2013.

SG&A Detail; Certain Financial Matters

The Company has included Adjusted SG&A and Adjusted EBITDA, non-U.S. 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-U.S. 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 U.S. GAAP financial measure (earnings
(loss) from continuing operations) in that it does not include certain items, as does Adjusted SG&A. These items are excluded by management as they are non-recurring and/or not relevant to analysis of ongoing business operations and 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 SG&A and Adjusted EBITDA, management also utilizes U.S. GAAP performance measures such as gross margin, return on investment, return on equity and cash flow from operations. As a result, Adjusted SG&A and Adjusted EBITDA may not reflect important aspects of the results of the Company's operations.

                                                                     For the Years Ended
                                                                 52 Weeks          52 Weeks
                                                                February 2,       February 3,
                                                                   2014              2013
SG&A Expenses from Continuing Operations
Store support center (1)                                       $      25,063     $      20,228
Distribution center                                                    6,185             6,759
401K expense                                                               4                 0
Same-store SG&A (2)                                                  106,168           103,261
Non same-store SG&A (3)                                                3,205               653
Share-based compensation                                                 404               381
SG&A as reported                                                     141,029           131,282
Less:
Share-based compensation                                                (404 )            (381 )
Gain (loss) on sale of fixed assets (1)                                   36              (141 )
                                                                         337
Adjusted SG&A from Continuing Operations                       $     140,962     $     130,760

Adjusted SG&A as % of sales                                             29.7 %            27.1 %

Sales per average selling square foot (4)                      $      107.90     $      111.75

Gross Margin dollars per average selling square feet (4)       $       31.26     $       34.36

Adjusted SG&A per average selling square foot (4)              $       32.38     $       30.76

Adjusted EBITDA per average selling square foot (4)(5)         $       (1.53 )   $        3.42

Average inventory per average selling square feet (4)(6)(7)    $       33.15     $       32.14

Average selling square feet (4)                                        4,344             4,251

Total stores operating beginning of period                               217               216
Total stores operating end of period                                     212               217
Total stores less than twelve months old                                   3                 5
Total non-same stores                                                      3                 5

Supplemental Data:
Same-store gross margin dollar change                                  -10.6 %             0.2 %
Same-store SG&A dollar change                                            2.8 %            -0.7 %
Same-store total customer count change (52 weeks)                       -6.0 %            -5.0 %
Same-store average sale per ticket change (52 weeks)                     2.9 %             4.0 %


______________________________________

(1) Store support center includes gain (loss) on disposal of fixed assets and costs associated with office relocation and merger activity.

(2) Same-stores are those stores which were open at the end of the reporting period, had reached their fourteenth month of operation, and include store locations, if any, that had experienced a remodel, an expansion, or relocation. Same-stores also include the Company's transactional website.


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(3) Non same-stores are those stores which have not reached their fourteenth month of operation.

(4) Average selling square feet is calculated as beginning square feet plus ending square feet divided by 2

(5) Adjusted EBITDA per average selling square foot is calculated as Adjusted EBITDA divided by average selling square feet

(6) Average store level merchandise inventory is calculated as beginning inventory plus ending inventory divided by 2

(7) Excludes inventory for unopened stores

Store support center SG&A for fiscal 2014 increased $4.8 million, or 23.9%. The net increase was primarily attributable to costs associated with merger activity ($2.4 million), the relocation of the Company's corporate office ($1.1 million), and increases in payroll and benefits ($0.5 million).

SG&A expenses attributable to same-stores increased $2.9 million or 2.8% during fiscal 2014 compared to fiscal 2013. The net increase was primarily attributable to increase in net advertising costs ($2.0 million) and increase in utilities due to prolonged winter conditions ($1.0 million).

SG&A expenses attributable to non same-stores increased $2.6 million during fiscal 2014 compared to fiscal 2013.

Reconciliation and Explanation of Non-U.S. GAAP Financial Measures

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

                                                                                              13 Week         14 Week
                                        For the Thirty-Nine            Trailing Twelve        Period          Period
                   53 Weeks              Week Periods Ended             Periods Ended          Ended           Ended          52 Weeks
                                   November 3,       October 28,         November 3,        February 2,     February 3,
                  Fiscal 2013          2013             2012                2013               2014            2013          Fiscal 2014
Net earnings
(loss)           $       1,307          (17,806 )            (673 )             (15,826 )        (8,619 )         1,980           (26,425 )
Plus:
Interest                 3,477            2,862             2,394                 3,945             972           1,083             3,834
Taxes                      311            4,924              (443 )               5,678             108             754             5,032
Depreciation
and
amortization             8,902            6,539             6,479                 8,962           4,006           2,423            10,545
EBITDA                  13,997           (3,481 )           7,757                 2,759          (3,533 )         6,240            (7,014 )
Plus:
Share-based
compensation               381              335               327                   389              69              54               404
(Gain) loss
asset
disposals                  141                -                (4 )                 145             337             145               337
Adjusted
EBITDA                  14,519           (3,146 )           8,080                 3,293          (3,127 )         6,439            (6,273 )

Cash                     3,160            2,972             1,179                 2,972           2,230           3,160             2,230
Debt                    79,962           94,029            74,745                94,029         108,407          79,962           108,407
Debt, net of
cash             $      76,802           91,057            73,566                91,057         106,177          76,802           106,177


______________________________________


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Seasonality and Quarterly Results

The following table sets forth the Company's net sales, gross margin, income
from operations and net earnings during each quarter of fiscal years 2014 and
2013:

                                                First          Second         Third          Fourth
                                               Quarter        Quarter        Quarter        Quarter
Fiscal 2014            Net sales              $    114.0          122.5          106.7          130.9
                       Gross margin                 33.7           38.7           27.9           35.5
                       Earnings (loss) from
                       continuing
                       operations                   (1.6 )          0.6          (16.1 )         (7.4 )
                       Net earnings (loss)          (1.7 )          0.5          (16.6 )         (8.6 )
                       Net earnings (loss)
                       per share (1):
                       Basic                       (0.51 )         0.15          (5.08 )        (2.65 )
                       Diluted                     (0.51 )         0.15          (5.08 )        (2.65 )

Fiscal 2013            Net sales              $    113.8          118.4          105.9          143.6
                       Gross margin                 33.6           38.8           32.9           40.7
. . .
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