ALCS is a net-net trading at 0.55x P/NCAV and 0.32x P/NTA. Current P/NTA valuations imply a 31% discount to its 5 year average P/NTA of 0.47.
Financial And Business Risks
ALCS has a high gross debt-to-equity ratio of 53.8%. Since all leases are accounted for as capital leases, there is no need to adjust for debt to take into accounting operating leases. Inventory days, a key indicator for retailers like ALCS, have increased to 170 days from 150 days in 2008.
A niche operating strategy is a double-edged sword. A significant portion of its total sales is derived from stores located in Kansas, Texas and Nebraska, rendering it susceptible to local economic and weather conditions in these states. For example, a drought in the mid-west caused September same-store sales to fall 4.3%.
During the fourth quarter of fiscal 2012, ALCS elected to change its method of accounting for inventory from the retail inventory method to the weighted average cost method. ALCS claims the cost method is preferable to the retail inventory method because it more accurately measures the cost of the company’s inventory and provides better matching of revenues and expenses. The change has been retroactively applied and decreased cost of sales and increased gross margin for the quarter ended July 31, 2011 and the 26 weeks ended July 31, 2011 by $1.7 million and $2.3 million, respectively. Any change in accounting policy with a positive impact on earnings, should rightfully be viewed with skepticism.
Business Quality and Capital Allocation
ALCS' business strategy is to locate its Alco stores in smaller markets where there is no direct competition with larger national or regional broad line retail chains. Despite claims of barriers to entry, ALCS like other niche discount retailers have no real significant competitive advantages. This is reflected in a 10 year book value per share CAGR of 1.6%.
On Oct. 10, 2012. ALCS announced that it has acquired 460,158 shares of its common stock, approximately 12% of the outstanding shares, in a transaction with a major shareholder. The share repurchase program, initially authorized in 2006 for up to 200,000 shares was renewed in 2012, giving ALCS authorization to repurchase an additional 500,000 shares, for a total of 700,000 shares. Following the recent transaction, ALCS still has remaining authority to purchase up to 89,538 additional shares of stock under the program.
Given the high leverage and the lack of real competitve advantages, I will not consider ALCS at this point in time.
The author does not have a position in any of the stocks mentioned.