Is Duckwall-Alco (DUCK) Beginning to Fly?

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Sep 17, 2010
Duckwall-ALCO Stores, Inc. operates as a regional broad line retailer in the central United States. The company operates ALCO stores that offer a line of merchandise consisting of approximately 35,000 items, including automotive, candy, crafts, domestics, electronics, fabrics, furniture, hardware, jewelry, pre-recorded music and video, and stationery products, as well as health and beauty aids, housewares, sporting goods, seasonal items, and toys. It also offers ladies', men's, and children's apparel and shoes. In addition, the company also operates Duckwall stores, which offer a limited selection of merchandise. As of February 16, 2010, it operated 258 stores in 23 states in the central United States. The company was founded in 1901 and is based in Abilene, Kansas.


What makes DUCK’s 209 ALCO stores competitively unique, is that more than 70% operate in primary markets that do not have another broad-line retailer. From the Company’s annual report:


ALCO stores [are] primarily in towns with populations of typically less than 5,000 that are in trade areas with populations of less than 16,000 where:


(1) there is no direct competition from national or regional broad line retailers;


(2) economic and demographic criteria indicate the market is able to commercially support a broad line retailer; and


(3) the opening of an ALCO store would significantly reduce the likelihood of the entry into such market by another broad line retailer.


The ALCO stores account for approximately 96% of the Company's net sales. The current ALCO store averages approximately 21,000 square feet of selling space. The 21,000 square feet of selling space is large enough to permit a full line of the Company's merchandise, while minimizing capital expenditures, labor costs and general overhead costs.


The Company operates a 352,000 square foot distribution center in Abilene, Kansas, from which it services all stores. The distribution center is responsible for distributing approximately 80% of the Company's merchandise, with the balance being delivered directly to the Company's stores by its vendors.


Like most retailers, DUCK has been under pressure during the recession. Same-store sales declined -5.1% in 2009 and were also down -5.1% in Q2 of 2010. A new CEO, Richard Wilson, a former consultant to the Company, was hired in February 2010. He appears focused on reducing expenses, improving working capital, paying down debt and improving merchandising. While he has only been there a short time, there are some encouraging signs.


One important initiative is a new partnership with Associated Wholesale Grocers (AWG), a major food distributor headquartered in Kansas City. The alliance with AWG will provide Alco’s customers with new products under the “Best Choice” and “Always Save” brands. Both brands offer national brand quality at more competitive prices. The initiative will be delivering more than 400 new items into Alco stores by the end of September. The improved grocery component of Alco’s business could drive additional foot traffic into the stores.


July and August same store sales are significantly improved from Q2 trends.


Management’s compensation is ROE based – so they are highly incentivized to find ways to reduce invested capital, grow revenue and improve margins.


At 0.5x Tangible book and generating free cash flow, DUCK trades at an attractive financial integrity multiple. The upside lies in earning increasing amounts on capital as the store base delivers on restructuring initiatives undertaken in the last six months.


Michael Price (one of the best balance sheet investors around) through MFP Investors, LLP owns 6.9% of the stock.