Friday, December 03, 2004

Company Report: 12/3/04
Ticker: DUCK
Exchange: NASDAQ
Price: $17.00 (12/3/04 close)
Market Cap: $74 million
P/E Ratio: 12.5
Shares Outstanding: 4.38 million
2003 sales: $423.5 million
Net Income: $6.3 million
Book Value per share:$25.23

First of all, I’ve got to admit that I had never heard of this company either. Headquartered in Kansas, the company is a regional discount retailer operating in 21 states in central U.S. It is comprised of two segments, ALCO Stores (185 total) which account for 92 % of company sales, and Duckwall Stores (80 total), accounting for 8 percent of sales. (Sales Data as of 2nd quarter, 2005).
The retail business is one of the most competitive, so how can a small-time chain such as this compete with the big boys? It doesn’t try to. As stated in the company’s 2nd quarter 2005 10Q report:

“The Company’s overall business strategy involves identifying, and opening stores in towns that currently have no direct competition from another larger national or regional full-line discount retailer. The Company’s business activities include operation of ALCO discount stores in towns with populations which are typically less than 5,000 not served by other regional or national full-line discount chains and Duckwall variety stores that offer a more limited selection of merchandise which are primarily located in communities of less than 2,500 residents”

THE NCAV STORY (Data as of 3rd quarter 2005)
Current Assets: $157.9 million
Current Liabilities: $53 million
LT Debt: $18 million
Other LT Liabilities: $4 million
NCAV: 82.9 million
Market Cap: 74 million
NCAV/MKT Cap: 1.12

Composition of current assets:
Cash: $3 million
Receivables: $ 2 million
Prepaid expenses and other: $3.4 million
Inventory: $149.2 million

The quality of current assets is not outstanding, but typical for a retailer. The company has $3 million in cash, but the bulk of current assets, $149 million, is inventory. (As students of NCAV investing know, cash is the most valuable current asset.) Still, the company is trading below its net current asset value. Remember also, that NCAV calculations completely ignore long-term assets. In Duckwall’s case, we are ignoring nearly $27 million in net property and equipment, and $4 million in other assets. These values represent book value; it is difficult to estimate their true value.

Institutional Ownership
One interesting facet to this company is that there is institutional ownership; quite rare for a company of this size. As of 9/04, Heartland Advisors, Franklin Resources, Dimensional Fund Advisors, and Royce Associates (to name a few) owned a combined 28 percent.

If nothing else, this is an interesting story to follow. The risks are obvious: it’s difficult for any retailer to prosper given the competitive environment. However, the company’s strategy makes sense: go to the towns no one else will. The company has been profitable for years, yet still trades below its NCAV. Just keep in mind how rare that is. Finally, with the company trading at just over 4 times cashflow, and 2/3 book, deep value investors may want to dig further.

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