Duckwall-ALCO Stores, Inc.

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Duckwall-ALCO Stores, Inc.

401 Cottage Street
Abilene, Kansas 67410
U.S.A.
(913) 263-3350
Fax: (913) 263-7531
Public Company
Incorporated: 1901 as The Racket Store
Employees: 4,850
Sales: $323.3 million (1998)
Stock Exchanges: NASDAQ
Ticker Symbol: DUCK
SICs: 5331 Variety Stores

A regional discount retailer, Duckwall-ALCO Stores, Inc. operates more than 200 stores in an 18-state region surrounding the central United States. Duckwall-ALCO’s stores operate under two names, Duckwall and ALCO, but all of the company’s retail outlets share the distinction of operating in small rural communities. Of the company’s two formats, ALCO represents the dominant force. There were 152 ALCO stores in operation in 1998, each stocking roughly 35,000 items, including automotive supplies, candy, crafts, electronics, fabrics, furniture, hardware, jewelry, health and beauty aids, and housewares. The company’s Duckwall variety stores, similar to the typical five-and-dime store popular during the first half of the 20th century, offer a more limited selection of merchandise. In 1998 there were 60 Duckwall stores in operation. Duckwall-ALCO’s strategy focused on tapping consumer demand in small rural towns with populations lower than 5,000 and in markets comprising fewer than 16,000 residents. By adhering to this strategy, the company operated in communities frequently ignored by other discount retailers.

Early 20th-century Origins

Duckwall-ALCO traced its roots to humble and rural beginnings, back to the first store opened by the company’s entrepreneurial founder, A. L. Duckwall, Sr. Duckwall laid the foundation for an enterprise that would endure for more than a century when he spent $400 in 1901 to establish The Racket Store. A variety merchandise store, Duckwall’s first retail creation “offered a little bit of everything,” according to its owner, presenting the store’s farmland customers with an array of goods from which they had rarely had the luxury to choose. This premise set the theme for subsequent stores established in the following decades. The generations of leadership that followed in Duckwall’s wake continued to target rural communities deprived of the diversity of merchandise to which their urban counterparts had become accustomed. In the decades following the success of The Racket Store, a steady stream of variety stores were established in rural communities, each operating under the Duckwall banner. The concept, and the series of new stores that presented the concept to eager rural customers, proved to be an encouraging success, able to surmount the economic vagaries of the first half of the 20th century and adapt to the changing consumer tastes of the years. By the end of the 1960s, after six decades of tapping rural demand for a potpourri of goods, there were 100 Duckwall variety stores situated in the Midwest, positioned in rural towns with populations ranging between 2,000 and 10,000.

The late 1960s marked a signal turning point in the business established by A. L. Duckwall, Sr., a defining transition that was overseen by his son, A. L. Duckwall, Jr. By 1968 the company had opened its first ALCO discount store. Although the opening of the first discount-oriented store did not drastically alter the heart of the company’s strategic philosophy of catering to rural customers, it did represent a decided shift toward a new merchandising strategy. The success of the first ALCO store heralded the birth of a new, stronger retail breed and sounded the death knell for Duckwall’s variety store concept. During the seven decades separating the beginning of the 1970s and the era in which Duckwall had opened his first store, the dynamics of operating a retail business in a rural setting had changed considerably. The modern rural customer had become accustomed to a broad selection of merchandise as large national chains moved into smaller communities. Accordingly, price became the leverage point for any retail business hoping to succeed against much larger competition. Duckwall-ALCO, operating under its new corporate name, had changed with the times.

1980s Acquisitions

By the early 1980s the number of Duckwall variety stores operated by the company, which had peaked at 100 units ten years earlier, had been winnowed down to 34. In their stead, a slew of ALCO discount stores had emerged, stores that by this point bore the burden of driving the company’s financial growth. Of the roughly $200 million Duckwall-ALCO was collecting in sales during the early 1980s, the 34 Duckwall variety stores contributed a mere $10 million. A changing of the guard had taken place at the company’s Abilene, Kansas, headquarters, and all hopes were pinned to the vitality of the ALCO chain. For those executives who awaited strident financial growth, however, the early 1980s were remembered as a tortuous time.

During the early 1980s Duckwall-ALCO was best known as a rurally oriented retail chain based in the birthplace of President Dwight D. Eisenhower. It was also known—and quickly disregarded by those on Wall Street—as a company suffering from anemic financial performance. In 1981, for instance, sales increased a paltry one percent, as profits slid precipitously by 24 percent. As one analyst noted at the time, in reference to Duckwall-ALCO’s regard among investors, “It was an ignored stock for a long, long time.” Caught in the grip of pernicious economic recession, Duckwall-ALCO executives were grappling to find a solution and end the trauma. Their salvation was found through an important acquisition, completed just as the company’s financial standing was becoming precarious.

In May 1983, in a deal brokered with a handshake in February, Duckwall-ALCO acquired Sterling Stores Co. Inc., the parent company of a 48-store discount chain based in Little Rock, Arkansas, that operated under the name Magic Mart. Its inclusion within Duckwall-ALCO’s fold was the remedy for which company executives were searching, quickly effecting an about-turn in Duckwall-ALCO’s financial performance. The Magic Mart chain, which generated $111.6 million in revenues in 1982, was credited for the robust increase in Duckwall-ALCO’s financial totals, arresting what threatened to be a damaging slide and restoring to its new owner the solid financial state it historically had enjoyed. Less than two years after watching profits sink 24 percent, Duckwall-ALCO’s stock price more than tripled. In 1983 sales swelled to $317 million, up nearly 50 percent from the previous year’s total. The company’s profits accomplished an even more dramatic leap, nearly doubling to $8.6 million. By all measures, the company once again stood as a solid performer, piquing the interest of Wall Street and earning the respect of other similarly sized retailers competing for the business of rural consumers.

Buoyed by the resurgence realized from the Sterling/Magic Mart acquisition, Duckwall-ALCO made another move on the acquisition front a short time later. In January 1984 the company purchased four discount stores in Wichita, Kansas, operating under the David’s banner. One year later Duckwall-ALCO completed another acquisition, acquiring nine stores from the Illinois-based Hornsby chain. The acquisitions were indicative of the optimism pervading Duckwall-ALCO’s corporate offices, the same optimism that prompted a management-led leveraged buyout of the company in 1985. A. L. Duckwall, Jr., the last member of the founding family to head the business, had decided to retire at roughly the same time an investment firm, E.F. Hutton LBO, approached Duckwall-ALCO’s president, Robert Soelter, about initiating the buyout. Planning to include as many as 57 ALCO managers in the buyout group, Soelter pushed ahead with the deal, completing the purchase of the company in September 1985. At this point there were 127 ALCO discount department stores in operation in 14 states, complemented by 33 Duckwall variety stores operating in a four-state territory. The strength of the company resided in its ALCO units, which served as one-stop-shopping destinations situated in markets too small to support specialty stores.

Troubles in the Late 1980s

Slightly less than three years after the management-led buyout, Soelter retired, paving the way for the promotion of Glen Shank, a Duckwall-ALCO employee since 1973 and merchandising vice-president for the previous eight years. To Shank, who would guide the company through the 1990s, fell the unenviable responsibility of announcing Duckwall-ALCO’s most devastating news in its nearly 90-year history. In May 1989 Duckwall-ALCO, the promising and vibrant discount retailer of the early and mid-1980s, filed for Chapter 11 protection, a last-ditch effort to stave off deleterious financial losses. Duckwall-ALCO’s darkest hour had not arrived suddenly. Between 1986 and early 1989 the company had closed 20 stores, as poor profit performance at a number of the stores forced closures. By 1989 the piecemeal elimination of unprofitable stores was no longer an option. The financial losses racked up by dozens of stores had become too severe. Wholesale changes were desperately needed, and Shank, who barely had time to settle into his new position at Duckwall-ALCO, was the central figure responsible for devising what those sweeping changes needed to be.

The root of the problem, ironically, was the source of Duckwall-ALCO’s strident growth during the early and mid-1980s. The three acquisitions the company had completed between May 1983 and January 1985 had done much to revitalize Duckwall-ALCO’s financial health, but the absorption of the acquired stores had also created serious problems. Magic Mart, the greatest savior of the three acquisitions, also ranked as the biggest culprit, bringing the company in close competition with giant national discount chains such as Arkansas-based Wal-Mart. Prior to the acquisition of the Magic Mart chain, Duckwall-ALCO had competed directly against Wal-Mart in six of its markets; after the acquisition, Duckwall-ALCO was positioned in close proximity to Wal-Mart in 40 new markets. The results were disastrous. Duckwall-ALCO could not compete effectively against the far more financially powerful Wal-Mart, as consumers flocked to the larger stores operated by the behemoth Arkansas retailer.

By the time the company filed for Chapter 11, it had identified 52 of its worst-performing stores, units that registered $10 million in losses in 1988 alone. The stores were scattered throughout a ten-state territory and included many of the units acquired from Magic Mart, David’s, and Hornsby. On May 15, 1989, all 52 of the stores were closed, stripping the company of one-third of its store count. Next began the arduous task of developing a reorganization plan, as Shank labored to find a solution that would appease creditors and enable Duckwall-ALCO to emerge from under the protective umbrella of Chapter 11. For two years the reorganization process dragged on until at last Duckwall-ALCO received approval to begin anew in 1991.

The road back to a healthy and promising future was a difficult course to travel, and it did not progress quickly. After Chapter 11, it took roughly two years before company officials could point to anything that suggested a return to consistent prosperity. The first solid sign arrived in 1993, when Duckwall-ALCO posted a heartening $2.3 million in earnings. The next positive development occurred in the fall of 1994, when the company completed a successful initial public offering of stock. (Throughout its history the company had vacillated between public and private ownership.) With the proceeds gained from the company’s stock offering, it entered 1995 with the best opportunity it had seen in years for a full revival. Optimism had returned to the company’s headquarters in Abilene.

As proof of the bright outlook Duckwall-ALCO officials embraced, the company announced it would open 20 stores a year as it entered 1995. Planning to open three ALCO discount stores for every two Duckwall variety stores it opened, the company was employing the strategy it had devised to compete against larger discounters and to protect itself from the profit erosion that had signaled its near collapse in 1989. Duckwall-ALCO executives resolved to establish new stores in the smallest of rural communities, reducing its maximum population base for a store to fewer than 16,000 residents in a particular market and fewer than 5,000 residents in a targeted town. The plan placed a new emphasis on the once-forsaken Duckwall format. Further, it was a preemptive expansion strategy predicated on avoiding competition rather than meeting other regional discounters head on. By opening a store in a location that met the company’s population criteria, Duckwall-ALCO established a presence that discouraged other, similarly sized discount retailers from encroachment and positioned it in markets largely ignored by heavyweights such as Wal-Mart. The operating strategy developed by A. L. Duckwall, Sr., in 1901 had been fine-tuned for the 1990s.

To the relief of anxious Duckwall-ALCO executives, the strategy worked. Financial health returned to the company, with a consistency and strength that suggested a complete turnaround from the troubled late 1980s and early 1990s. Moreover, optimistic expectations for the future were buttressed by the identification of more than 100 locations that were “understored” in markets matching the company’s demographic criteria. Accordingly, expansion pushed ahead as the company moved into the late 1990s and neared its centennial.

In September 1996 Duckwall-ALCO acquired 14 retail locations from New Castle, Indiana-based Val Corp., which added stores located in eastern Indiana and western Ohio. The acquired stores were remodeled as ALCO units and reopened in early 1997, accelerating the company’s previously announced expansion pace. In November 1997 Duckwall-ALCO acquired 18 stores located in Texas and New Mexico from Perry Brothers, Inc., which debuted as Duckwall units in early 1998. On this note, with the pace of expansion exceeding expectations and the company’s financial growth pointing to a healthy enterprise, Duckwall-ALCO prepared for the century ahead and the coming celebration of its 100th year of business. As it had been since 1901, Duckwall-ALCO was firmly rooted in the rural communities of America.