Amendment No. 7 to Schedule 13D

CUSIP No 264142100

Page 6 of 10 Pages

Raymond J. R. French

Company Director

Ballacoyne

Cammall

Kirk Michael

Isle of Man IM6 1AU British Isles.

-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GHYVaZvAPIX/nFbLt+DW7a46BE+Lu1e3P153wLhHnuVrErk9+vWuIPp/XDJFYLiv 3sx5YhXPkvYFZV2fSL26cg== 0001193125-07-250994.txt : 20071120 0001193125-07-250994.hdr.sgml : 20071120 20071120122019 ACCESSION NUMBER: 0001193125-07-250994 CONFORMED SUBMISSION TYPE: SC 13D/A PUBLIC DOCUMENT COUNT: 2 FILED AS OF DATE: 20071120 DATE AS OF CHANGE: 20071120 GROUP MEMBERS: RAYMOND A. D. FRENCH GROUP MEMBERS: STRONGBOW CAPITAL MANAGEMENT, LTD. SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: DUCKWALL ALCO STORES INC CENTRAL INDEX KEY: 0000030302 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 480201080 STATE OF INCORPORATION: KS FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: SC 13D/A SEC ACT: 1934 Act SEC FILE NUMBER: 005-43827 FILM NUMBER: 071258951 BUSINESS ADDRESS: STREET 1: 401 COTTAGE STREET CITY: ABILENE STATE: KS ZIP: 67410-0129 BUSINESS PHONE: 9132633350 MAIL ADDRESS: STREET 1: DUCKWALL ALCO STORES INC STREET 2: 401 COTTAGE CITY: ABILENE STATE: KS ZIP: 67410 FORMER COMPANY: FORMER CONFORMED NAME: DUCKWALL STORES INC DATE OF NAME CHANGE: 19781020 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: STRONGBOW CAPITAL LTD CENTRAL INDEX KEY: 0001286480 IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13D/A BUSINESS ADDRESS: STREET 1: C/O IRONSHORE CORPORATE SERVICES STREET 2: P O BOX 1234 CITY: CAYMAN ISLANDS BRITISH W I STATE: E9 ZIP: 00000 BUSINESS PHONE: 3459456264 MAIL ADDRESS: STREET 1: C/O IRONSHORE CORPORATE SERVICES STREET 2: P O BOX 1234 CITY: CAYMAN ISLANDS BRITISH W I STATE: E9 ZIP: 00000 SC 13D/A 1 dsc13da.htm AMENDMENT NO. 7 TO SCHEDULE 13D Amendment No. 7 to Schedule 13D

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 13D

(Amendment No. 7)

DUCKWALL-ALCO STORES, INC.

(Name of Issuer)

COMMON STOCK, PAR VALUE $.0001

(Title of Class of Securities)

264142100

(CUSIP Number)

Leonard Chazen, Esq.

Covington & Burling LLP

620 Eighth Avenue

New York, New York 10018

(212) 841-1000

(Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications)

November 20, 2007

(Date of Event which Requires Filing of this Statement)

If the filing person has previously filed a statement on Schedule 13G to report the acquisition which is the subject of this Schedule 13D, and is filing this schedule because of §§240.13d-1(e) or 240.13d-1(f) or 240.13d-1(g), check the following box ¨

Note. Schedules filed in paper format shall include a signed original and five copies of the schedule, including all exhibits. See 240.13d-7 for other parties to whom copies are to be sent.

SEC 1746 (11-03)

CUSIP No 264142100

Page 2 of 10 Pages


1	NAME OF REPORTING PERSON Strongbow Capital, Ltd. I.R.S. IDENTIFICATION NO. OF ABOVE PERSON None
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS WC
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)	¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Cayman Islands, British West Indies


Number of Shares Beneficially Owned By Each Reporting Person With		7 SOLE VOTING POWER 0
		8 SHARED VOTING POWER 543,517
		9 SOLE DISPOSITIVE POWER 0
		10 SHARED DISPOSITIVE POWER 543,517


11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 543,517
12	CHECK IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES	¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.3%
14	TYPE OF REPORTING PERSON CO

CUSIP No 264142100

Page 3 of 10 Pages


1	NAME OF REPORTING PERSON Strongbow Capital Management, Ltd. I.R.S. IDENTIFICATION NO. OF ABOVE PERSON None
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS AF
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)	¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Cayman Islands, British West Indies


Number of Shares Beneficially Owned by Each Reporting Person With		7 SOLE VOTING POWER 0
		8 SHARED VOTING POWER 543,517
		9 SOLE DISPOSITIVE POWER 0
		10 SHARED DISPOSITIVE POWER 543,517


11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 543,517
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES	¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.3%
14	TYPE OF REPORTING PERSON CO

CUSIP No 264142100

Page 4 of 10 Pages


1	NAME OF REPORTING PERSON Raymond A. D. French I.R.S. IDENTIFICATION NO. OF ABOVE PERSON
2	CHECK THE APPROPRIATE BOX IF A MEMBER OF A GROUP (a) ¨ (b) x
3	SEC USE ONLY
4	SOURCE OF FUNDS 00
5	CHECK IF DISCLOSURE OF LEGAL PROCEEDINGS IS REQUIRED PURSUANT TO ITEM 2(d) OR 2(e)	¨
6	CITIZENSHIP OR PLACE OF ORGANIZATION Republic of Ireland


Number of Shares Beneficially Owned by Each Reporting Person With		7 SOLE VOTING POWER 0
		8 SHARED VOTING POWER 543,517
		9 SOLE DISPOSITIVE POWER 0
		10 SHARED DISPOSITIVE POWER 543,517


11	AGGREGATE AMOUNT BENEFICIALLY OWNED BY EACH REPORTING PERSON 543,517
12	CHECK BOX IF THE AGGREGATE AMOUNT IN ROW (11) EXCLUDES CERTAIN SHARES	¨
13	PERCENT OF CLASS REPRESENTED BY AMOUNT IN ROW (11) 14.3%
14	TYPE OF REPORTING PERSON IN


CUSIP No 264142100		Page 5 of 10 Pages

This Amendment No. 7 to the Schedule 13D (the “Schedule 13D”), dated November 20, 2007, is filed with the U.S. Securities and Exchange Commission (the “SEC”) by Strongbow Capital, Ltd., Strongbow Capital Management, Ltd. and Raymond A. D. French.

Item 1.

Security and Issuer

This Schedule 13D is filed with respect to the common stock $.0001 par value (“Common Stock”) of Duckwall-ALCO Stores, Inc., a Kansas corporation (“Duckwall” or the “Company”). The principal offices of Duckwall are located 401 Cottage Street, Abiline, KS 67410.

Item 2.

Identity and Background

This Statement is filed on behalf of Strongbow Capital, Ltd., Strongbow Capital Management, Ltd. and Raymond A. D. French, who are referred to as the “Filing Parties”.

Items 2(a)-(c), (f)

I. Filing Parties

1. Strongbow Capital, Ltd. (“Strongbow”) is a limited liability company organized under the laws of the Cayman Islands, British West Indies with its principal office and business at Queensgate House, South Church Street, P.O. Box 1234GT, Cayman Islands, British West Indies. Strongbow is an investor in equity securities. Strongbow is managed by its Board of Directors.

2. Strongbow Capital Management, Ltd. (“SCM”) is a limited liability company organized under the laws of the Cayman Islands, British West Indies with its principal office and business at Queensgate House, South Church Street, P.O. Box 1234GT, Cayman Islands, British West Indies. SCM acts as an investment manager to Strongbow. SCM is the sole owner of the voting shares of Strongbow and is the controlling entity of Strongbow.

3. Raymond A. D. French is a citizen of the Republic of Ireland whose address is Bayroc, Unit #404, Box CB 13043, Nassau, Bahamas. Mr. French is a company director. Mr. French is Chairman of SCM and is the controlling person of SCM. Mr. French’s email address is: rayfrench@strongbow-capital.com

II. Executive Officers and Directors.

Strongbow has no executive officers. The names, present principal occupations and business addresses of the directors of Strongbow are set forth below.

Name

Occupation

Address

Citizenship

Raymond A. D. French

Company Director

Bayroc, Unit #404

Box CB 13043

Nassau, Bahamas

Irish

SCM has no executive officers. The names, present principal occupations and business addresses of the directors of SCM are set forth below.


Name	Occupation	Address	Citizenship
Raymond A. D. French	Company Director	Bayroc, Unit #404 Box CB 13043 Nassau, Bahamas	Irish

Raymond J. R. French	Company Director	Ballacoyne Cammall Kirk Michael Isle of Man IM6 1AU British Isles.	Irish

Items 2(d). Criminal Proceedings

During the last five years, neither the Filing Parties (or a controlling entity thereof) nor any executive officer or director of the Filing Parties (or a controlling entity thereof) has been convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors).

Item 2(e) Civil Securities Law Proceedings

During the last five years, neither the Filing Parties (or a controlling entity thereof) nor any executive officer or director of any of the Filing Parties (or a controlling entity thereof) has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction and as a result of such proceeding was or is subject to a judgment, decree or final order enjoining future violations of, or prohibiting or mandating activities subject to, federal or state securities laws or finding any violation with respect to such laws.


CUSIP No 264142100						Page 7 of 10 Pages

Item 3.

Source and Amount of Funds or Other Consideration.

No change from prior filing.

Item 4.

Purpose of Transaction.

Item 4 is hereby amended and restated as follows:

In a telephone conversation with Warren H. Gfeller, the Company’s Chairman, on September 26, 2007, Raymond A.D. French, one of the Filing Parties, proposed that the Board take the following actions:

1. Expand the size of the Board by one member and appoint Royce Winsten to fill the newly created Board position. The Filing Parties believe that Mr. Winsten is an astute financial analyst, who is knowledgeable about the Company and its business. Mr. Winsten is the managing director of Shore Capital Management, LLC, which is the principal executing broker for Strongbow Capital, Ltd., one of the Filing Parties.

2. Create an executive committee of the Board, which would be authorized to exercise all the powers and authority of the Board in the management of the business and affairs of the Company, to the extent permitted by the Company’s Charter and Bylaws and applicable law. In particular, the executive committee would be charged with overseeing efforts by management to achieve the following three important objectives:

Reduce average inventory levels. The Company has estimated that there is an opportunity to reduce average inventory per selling square foot by approximately 15% as a result of the more efficient inventory management and logistics resulting from the Company’s IT initiative. The achievement of this reduction in average inventory levels would release a large amount of capital that could be used to finance new stores or for other purposes.

Reduce SG&A expense. Because of the Company’s very high operating leverage, a small percentage reduction in SG&A expenses would have a major impact on the bottom line. The Filing Parties have been disappointed with management’s record at controlling SG&A expense and would expect the executive committee to play a major role in achieving this objective.

Reduce losses from shrinkage (i.e., pilferage).

Mr. French recommended that Lolan C. Mackey be appointed chairman of the executive committee and that Mr. Winsten be one of the members of the committee.

Following the telephone conversation, the Board carried out Mr. French’s suggestion to expand the size of the Board by one member and appoint Royce Winsten to fill the newly created Board position. To the knowledge of the Filing Parties, the Board has not carried out Mr. French’s proposal to create an executive committee of the Board with specific oversight over the three problem areas cited.

On November 20, 2007, Mr. French sent a letter to the Board expressing dissatisfaction with the results to date of the three-year turn around program which was intended to bring the Company’s percentage return on equity (ROE) to the mid teens. The letter discussed in detail the grounds for the Filing Parties’ belief that management had done an inadequate job at controlling SG&A expenses and reducing average inventory levels. The letter also communicated Mr. French’s belief that if management and the Board do not promptly remedy these problems, a change in management or a sale of the Company will be the only ways for shareholders to achieve a reasonable return on their investment. Mr. French stated that if the Filing Parties do not see satisfactory concrete progress in the problem areas they have identified and an acceptable improvement in the Company’s twelve-month run-rate ROE by the end of the third quarter of this fiscal year, they may nominate a slate of directors for election to the Board and make other proposals at the 2008 annual meeting. Between now and the 2008 annual meeting, the Filing Parties may take preliminary steps toward soliciting proxies at the annual meeting and identifying potential candidates to be elected to the Board and may communicate with and may engage in conversations with investment banks, prospective purchasers and others regarding a possible sale of the Company, while continuing to communicate with management, the Board and other shareholders regarding matters related to the Company.

The Filing Parties acquired the Common Stock beneficially owned by them for investment purposes. The Filing Parties intend to review their position with respect to the Company periodically, and depending upon their evaluation of all relevant factors, the Reporting Parties may determine to acquire or dispose of Common Stock on the open market or in private transactions on such terms and at such times as the Filing Parties find desirable.

Except as set forth above, no Filing Party has any present or proposed plan which would relate to or result in any of the matters set forth in subparagraphs (a) - (j) of Item 4 of Schedule 13D.


CUSIP No 264142100						Page 8 of 10 Pages

Item 5.

Interest in Securities of the Issuer.

(a) The following table sets forth information with respect to the Common Stock beneficially owned by each Reporting Person as of the close of business on November 19, 2007:


Name	Number of Shares	Approximate Percentage of Outstanding Shares²
Strongbow	543,517	14.3	%
SCM	543,517	14.3	%
Raymond A. D. French	543,517	14.3	%

(b) Strongbow has shared power to dispose or direct the disposition of 543,517 shares of Common Stock.

SCM has shared power to dispose or direct the disposition of 543,517 shares of Common Stock.

Raymond A. D. French has shared power to dispose or to direct the disposition of 543,517 shares of Common Stock.

(d) In certain circumstances, SCM may have the right to receive a portion of the proceeds of the sale by Strongbow of greater than five percent of the shares of the class of Common Stock.

Item 6.

Contracts, Arrangements, Understanding or Relationships with Respect to Securities of the Issuer.

Except as described in Item 4 above, there are no contracts, arrangements, understandings, or relationships between the Filing Parties, on the one hand, and any persons, on the other hand, with respect to any securities of the Company.

Item 7.

Material to be filed as Exhibits.

Exhibit 99.1 Letter, dated November 20, 2007, from Mr. French to the Board of Directors of the Company.

²	Computed on the basis of 3,809,341 shares of Common Stock outstanding as of July 29, 2007 as specified in the Quarterly Report on Form 10-Q of the Company, filed with the SEC on 09/06/2007.


CUSIP No 264142100						Page 9 of 10 Pages

SIGNATURE

After reasonable inquiry and to the best of the knowledge and belief of the undersigned, the undersigned certifies that the information set forth in this statement is true, complete and correct.

Dated: November 20, 2007


STRONGBOW CAPITAL, LTD.

By:		/s/ Raymond A. D. French
		Raymond A. D. French
		Director

STRONGBOW CAPITAL MANAGEMENT, LTD.

By:		/s/ Raymond A. D. French
		Raymond A. D. French
		Director

RAYMOND A. D. FRENCH

By:		/s/ Raymond A. D. French


CUSIP No 264142100						Page 10 of 10 Pages

Exhibit Index

Exhibit 99.1

Letter, dated November 20, 2007, from Raymond A.D. French to the Board of Directors of Duckwall-ALCO Stores, Inc.

EX-99.1 2 dex991.htm LETTER DATED NOVEMBER 20, 2007 Letter dated November 20, 2007

Exhibit 99.1

[Strongbow Capital, Ltd. Letterhead]

November 20, 2007

Mr. Warren H. Gfeller

Mr. Robert L. Ring

Mr. Dennis A. Mullin

Mr. Lolan C. Mackey

Mr. Patrick G. Doherty

Mr. Dennis E. Logue

Mr. Royce Winsten

Duckwall-ALCO Stores, Inc.

401 Cottage Street

Abiline, KS 67410

To the Board of Directors,

Strongbow Capital, Ltd. owns 543,517 shares, or 14.27% of Duckwall-ALCO Stores, Inc. (the “Company”), making us the largest shareholder of the Company. To date, along with the Company’s other shareholders, we have been patient with the current board and current management in achieving the financial goals espoused by the Company’s Chairman and CEO at the start of the three-year turnaround program almost three years ago. However, this patience is being severely tested as the board both fails to achieve those goals and fails to take the steps necessary to correct the ongoing and very serious problems that we identified in our last 13D filing¹. We strongly believe that aggressively addressing – and more importantly correcting – those problems is key to the Company achieving the central turnaround goal of a mid-teens percentage return on equity (ROE), as set out publicly by the Company’s Chairman almost three years ago². Under the current board and management’s leadership, the Company has fallen far short of reaching this goal. In the last fiscal year the Company achieved an ROE of 5.5%; further, in the twelve month period ended with the second quarter of this year, it achieved an ROE of 3.88%. Even if the Company achieves its Operating Plan for this fiscal year, it will still fall far short of a mid-teens percentage ROE. For this reason, unless we see satisfactory concrete progress in the problem areas we have identified, and an acceptable improvement in the Company’s twelve-month run-rate ROE, by the end of Q3 of this fiscal year, we may nominate a slate of directors for election to the board and make other proposals at that 2008 annual meeting.

Since our last 13D filing, we are glad that you have added Mr. Royce Winsten to the board of directors. Royce is a very astute financial analyst and is of impeccable character. He has closely followed the Company for over three years and I know that he is very familiar with the Company’s strengths and weaknesses – and with what needs to be done to improve financial performance and shareholder value. Shareholders can sleep better knowing that Royce is on their Company’s board. However, he is just one of seven directors and is, on his own, therefore, severely limited in his ability to enact the improvements that are necessary if shareholders are to see maximum performance from the company.

However, we are not pleased with the Company’s apparent unwillingness to create an executive committee with specific responsibility for ensuring the three problem areas of SG&A expense control/reduction, Inventory reductions and Shrinkage are addressed and corrected by management, as we had also called for in our last 13D.

¹	SG&A expense control, Inventory reductions and Shrinkage.

²	In public conference calls with investors at that time and subsequently.

Over the last two-and-a-half years, the current board of directors has issued a total of 502,000 stock options to themselves and management – a number that equates to 13.17% of the current total shares outstanding of the Company³. To be clear, we have no problem with directors participating in a company’s success through stock options and typically support such participation. However, we have a serious problem with any board that awards themselves and management options to purchase a very significant percentage of a company’s equity and then fails to perform up to the standard that they themselves have led shareholders to expect. As cited above, your publicly stated goal of a mid-teens percentage ROE – which is in line with other public retailers – compares with your actual performance of a 5.5% ROE last fiscal year and a 3.88% ROE in the twelve months ended with the second quarter of this fiscal year⁴.

It is our strongly held opinion that the Company is significantly under-performing relative to its potential under optimal management. In the first two quarters of this fiscal year, SG&A expenses totaled $68.595 million compared with $60.744 million for the same period last year. This equates to growth of 12.92% in a period when the total number of selling square feet in the Company’s stores increased by just 2.2%. Further, this growth in expenses of $7.851 million more than offset the increase in Gross profit for the same period of $6.756 million, resulting in a reduction in EBITDA of $791,000 for the period. According to the Company’s second quarter 10-Q⁵, for the first two quarters of this fiscal year, Comparable store SG&A expense growth was 8.5%, compared with Same store sales growth of 1.7% in the same period. Looking at this expense growth on a per Average selling square foot basis also shows clearly the expense growth problem at the Company: this measure increased from $14.82/SF⁶ to $16.38/SF⁷ over the period - or by 10.52%. This compares with growth in Sales per average selling square foot of 1.24%⁸, growth in Gross profit per average selling square foot of 7.57% and an inflation environment of approximately 3% over the same period. Whether looked at on an aggregate, Comparable-store or per Average selling square foot basis, it is clear that SG&A expenses have been growing at a rate significantly in excess of both sales and inflation. This is completely unacceptable and inexcusable in our view. It is a fundamental and basic fact that a Company with thin operating margins easily loses gains made in revenues and gross profit where SG&A expenses are allowed to creep. Our Company has an annual SG&A expense figure that, last year, equated to 88% of Gross profit, so that the benefits of a 1% increase in Gross profit is almost entirely lost if, in the same period, SG&A expenses also increase by 1%. We strongly believe that this problem of expense creep neutralizing gains made in revenues and Gross profit has been central to the Company’s repeated failure to meet its own financial targets. It is management’s job to control expenses and it is the board’s duty to ensure that they do.

³	502,000 options divided by 3,809,341 shares outstanding at July 29, 2007.

⁴	Equals Net income of $4.108 million divided by the average Shareholders equity for the period of $105.797 million.

⁵	See fiscal 2008 Q2 form 10-Q, table on page 11 and top of page 12.

⁶	“SF” refers to Average selling square foot. For figures cited, see Q2 form 10-Q, page 11: http://www.sec.gov/Archives/edgar/data/30302/000003030207000011/duckwall10q07292007.htm.

⁷	See fiscal 2008 Q2 form 10-Q, table on page 11.

⁸

While we recognize that this period constituted a turnaround period for revenues given the newly installed IT system, this does not justify the SG&A expense growth for the period. The low rate of growth in sales per average selling square foot (less than the rate of inflation in the same period) may be partially excused by the fact that same store sales growth over this period was less than 2% for US retailers generally. However, going forward we will be watching closely for improvement in sales coming as a result of the IT system.

Our concern with the Company’s SG&A expense growth has been compounded this year by management’s clearly demonstrated inability to correctly budget and forecast this year’s SG&A expense number. We strongly believe that this is further evidence that nobody has been home when it comes to the critically important issue of SG&A expense control (let alone expense reductions). On June 20th, 2007, the Company released an 8-K that included the Company’s Revised 2008 Operating Plan⁹. That plan budgeted $135.979 million for SG&A expense for this year¹⁰. Up until a few weeks before the second quarter earnings release, the Company’s CEO continued to insist in conversations with me that my doubts about the Company’s ability to meet this figure were “premature” and “wrong”, that I was “jumping the gun”. However, while that budget assumed less than 1% growth in the store-level SG&A expenses in a 3% inflation environment, the Company could not describe to me any cost reduction programs planned or even any specific areas that they had targeted for reductions. In the absence of any specific expense reduction plans that would have enabled the Company to meet that optimistic budget, it is not surprising that the Company was subsequently forced to increase the SG&A budget to $141 million. In the face of this sloppy budgeting and troublingly high expense growth¹¹, you cannot expect us and our fellow shareholders to accept the claim that the Company has been sufficiently diligent with expenses and that there is not a problem.

The second issue we raised in our last 13D relates to the critically important issue of average inventory level reductions allowed by the implementation of the new IT system – as put forward by the Company as one of the central benefits of the IT investment in late 2005. As you know, the projected Inventory at the end of fiscal 2008 (February 5, 2008), was disclosed in both the initial 2008 Operating Plan¹² and the subsequent Revised 2008 Operating Plan¹³ . Given that the projected Average selling square feet numbers as at that date are also disclosed, we calculate that the first Operating Plan implies forecasted Inventory per SF at year end of $29.58/SF¹⁴, while the Revised Operating Plan implies a figure of $32.68/SF¹⁵. This pullback in the Company’s expectations for the rate of progress in inventory reductions by year-end is troubling. In addition, while it may be have been too soon to have expected significant reductions in the Company’s inventory level by the end of the second quarter of this year, we were disappointed by the fact

⁹	See: http://www.sec.gov/Archives/edgar/data/30302/000003030207000009/revisedfy2008plan.htm.

¹⁰	Equals Store level SG&A of $103.586 million, plus New store preopening expense of $2.706 million, plus Corporate level SG&A of $33.065 million, less Corporate level Depreciation of $3.378 million.

¹¹

By the end of the second quarter this year, the Company had used up 89% (or $7.851 million) of its budgeted growth in SG&A for the full year – and this is based on the upwardly revised $141 million SG&A expense budget as disclosed in the second quarter conference call with investors. Based on the prior budget for the full year as disclosed in the Revised 2008 Operating Plan (see 8-K dated June 20, 2007) of $135.979 million, the Company had used up 206% of the full year’s budget for growth in SG&A expenses by the end of the second quarter. These calculations are made based on the actual SG&A expenses for fiscal 2007 of $132.165 million.

¹²	Disclosed on the projected fiscal 2008 year-end balance sheet in the 8-K filing dated February 6th, 2007: http://www.sec.gov/Archives/edgar/data/30302/000091600207000007/form8k.htm.

¹³	Disclosed on the projected fiscal 2008 year-end balance sheet in the 8-K filing dated June 20th, 2007 (see Footnote 9 for link).

¹⁴	From the Feb. 6, 2007, form 8-K: $136,688,873 of projected Inventory divided by 4,620,934 projected Selling square feet equals $29.58/SF (see Footnote 12 for link).

¹⁵	From the June 20, 2007, form 8-K: $148,008,984 of projected Inventory divided by 4,528,902 projected Selling square feet equals $32.68/SF (see Footnote 9 for link).

that Inventory at the end of Q2 was actually $4.61 million higher than at the start of the fiscal year¹⁶, even though the Company’s total average selling square feet was virtually unchanged over the same period. As you know, the expected cash release from inventory reductions is needed to fund new stores. In a recent conversation with the Company, it was suggested to me that the slower than expected inventory reductions had raised a potential issue with regard to how the new stores would be financed later this year. As we have discussed, we are very concerned that because the board has allowed these inventory reductions to run behind schedule, the Company will be forced to add more debt to the balance sheet to fund the stores. If so, this will have been yet another example of this board and management falling short in achieving another important operational goal. I would also remind you of your pledge two-and-a-half years ago to the shareholders that an aggressive new store growth strategy would not be embarked upon until the performance of the existing stores had been maximized.

Meanwhile, as the board allows these serious issues to fester – without any apparent accountability of management for these failures – your recent focus on matters such as stock splits is particularly concerning to us as a major shareholder. The way to create value at this company is the same as that for any company – improve the financial performance and value will follow. Period. This must include an immediate addressing, and correcting, of the problem areas we have cited. It must also include holding the management of the Company accountable for its failures to meet the Company’s publicly stated goals. It is our opinion that if the board and management do not immediately focus on – and fix – the real issues relevant to growing shareholder value at the Company, the shareholders will not be able to achieve a reasonable return on their investment except through a change of management or a sale of the Company¹⁷.

The Company’s lackluster operating results are particularly disappointing because the Company has the potential to achieve outstanding results, if properly managed. It is our strongly held belief that the Company could produce significantly stronger financial performance if optimally managed and with proper board oversight. By the Company’s own forecast, which we believe is perfectly achievable if the Company is properly managed, EBITDA for this fiscal year should be in the range of $25-27 million¹⁸. In addition, in a Cost-Benefit analysis for the recently installed IT system¹⁹, the Company forecasted a $12.586 million positive swing in the annual benefit from the IT system between fiscal 2008 and fiscal 2009. Assuming efficient management, at least 75% of this figure should drop to the EBITDA line, equating to an incremental increase in EBITDA of $9.439 million (an amount that equates to 49.6% of the Company’s full-year EBITDA last year). In addition, the Company has forecasted²⁰ that the IT system will allow for average inventory reductions of approximately 15% per Average selling square foot; this would equate to a release of cash currently tied up in inventory of $23.39 million²¹, enough to fully finance 33 new leased

¹⁶	Inventory at July 30, 2007, of $156.019 million minus Inventory at Jan. 28, 2007, of $151.406 million equals an increase of $4.613 million over the period.

¹⁷	Very importantly, under a sale-of-the-company scenario, the correct choice of investment bank would be critical to achieving an optimal outcome for the Company’s shareholders.

¹⁸	See second quarter 2007 earnings release.

¹⁹

Disclosed in a form 8-K dated December 21, 2005 and an 8-K dated October 2, 2007 (as part of a Company presentation to investors and potential investors at the William Blair Small-Cap Growth Conference in New York on Wednesday, October 3, 2007): http://www.sec.gov/Archives/edgar/data/30302/000089109205002586/e23071.htm.

²⁰	In public conference calls with investors.

²¹	At July 29, 2007, average Inventory was $37.27 per selling square foot (equal to $156,019,000 of Inventory divided by 4,186,000 selling square feet.). With 4.186 million selling square feet, a 15% reduction would equate to $5.59 per square foot, or a total capital release of $23.39 million.

stores²². Again, under proper management this is achievable. Since each new store should be contributing $123,481 of EBITDA each year by their second year²³, these stores would be generating over $4 million²⁴ in annual EBITDA at that time (an amount that equates to 21.4% of the Company’s full-year EBITDA last year). It is worth repeating that, assuming the Company’s forecast for inventory reductions is achieved, the investment required to generate this incremental new store EBITDA would come 100% from cash currently tied up in inventory and would not require any additional debt or equity. In addition, every 1% reduction in SG&A expenses, which, as discussed above, we believe have not been properly controlled to date, would add another $1.4 million to annual EBITDA; therefore, even a 2% reduction under more efficient management would increase annual EBITDA by a further $2.8 million (an amount that equates to 14.7% of the Company’s full-year EBITDA last year). When these figures are aggregated, as set forth below, it is clear - from the Company’s own reasonable forecasts, and assuming some minor expense reductions - that the Company could be producing over $40 million²⁵ in annual EBITDA in the short term²⁶ - this figure is more than double what the Company is currently achieving under the leadership of the current board:


Fiscal 2008 Company estimated EBITDA:	$	25,000,000
Plus: Fiscal 2009 incremental EBITDA from IT system²⁷ :	$	9,439,000
Plus: Fiscal 2010 incremental EBITDA from 33 new stores²⁸ :	$	4,074,873
Plus: Incremental EBITDA from 2% reduction in SG&A exps.²⁹:	$	2,800,000
Equals: Total EBITDA:	$	41,313,873

Besides the opportunity to improve the Company’s operating results through better management, the Company also has the potential to increase sales and income dramatically by taking advantage of growth opportunities in its home market. In this regard, an important key characteristic that distinguishes our Company from most other public retailers is its mid-west, farm-belt markets. With a booming agricultural economy and a rapidly growing ethanol and bio-fuel sector, we believe this difference will increasingly be seen as an advantage for the Company versus retailers in other parts of the country. Besides offering the Company outstanding opportunities as a stand-alone business, this attractive niche market means that the Company could offer another retailer a unique diversification strategy. Consumers in the Company’s core markets are benefiting from a powerful economic tailwind that is transforming the mid-west farm economy: growing ethanol production activity, combined with dramatically higher agricultural commodity prices, are increasingly driving the regional economy in the Company’s core markets³⁰. Since the

²²	Assuming a required Total investment to open a new leased store of $700,000. The Company has previously disclosed this Total investment at $658,904 (see New Store Proforma in form 8-K dated December 21, 2005. See link at Footnote 19).

²³	See New Store Proforma in form 8-K dated December 21, 2005 (See link at Footnote 19).

²⁴	33 stores multiplied by $123,481 equals $4,074,873.

²⁵	This does not include the potential elimination of the costs directly attributable to the Company being a public company, which approximate $1.5-2.0 million per year according to the Company’s Chairman.

²⁶	Within 24 months.

²⁷	See Cost-benefit analysis for IT system in form 8-K dated December 21, 2005 (see Footnote 19 for link).

²⁸	Includes only new stores financed from cash unlocked from current Inventory, as described above. Further EBITDA from new stores financed with retained earnings or another source of capital would be additive.

²⁹	See above paragraph.

³⁰

The Company’s core market area overlaps very closely with the area with the highest concentration of ethanol production activities in the country. A map showing the locations of existing and expansion ethanol plants can be found on page 3 of the following recent paper on the US Department of Agriculture’s website: http://www.ers.usda.gov/Publications/FDS/2007/05May/FDS07D01/fds07D01.pdf.

economics of ethanol production require that these plants be close to the corn production that they consume, future growth in the ethanol industry in the US will almost certainly occur across the Company’s core market area. In addition, there is significant ethanol production activity in markets just to the north and east of the Company’s core markets, including Iowa, southern Minnesota, southern Wisconsin and Illinois. The Company has experience in these markets and they may represent exciting growth markets for new stores. Further, in this region increased ethanol-based economic activity is supplemented by the positive effects for the farm economy generally of higher grain and other agricultural commodity prices. The prices of all crops are being pushed up as farmer’s allocate increasing acreage to corn to meet huge new ethanol-related demand; this new demand factor has rippled through agricultural commodity markets, pushing up farm incomes and agricultural land values across the corn-belt. In stark contrast to what has happened in other parts of the country, as farm incomes have improved, the USDA reports that US farm balance sheets have strengthened as the industry has paid down debt – the average debt/assets ratio for the US farm sector is at an historic low of just 11.8% (down from over 20% in the mid-1980’s³¹). These combined factors bode well for both future economic activity and population growth in the Company’s core markets and open up exciting opportunities for new store growth in nearby markets also benefiting from these economic trends. While the effects of ethanol and bio-diesel production are already transforming the US farm economy, the USDA and others are forecasting significant further growth going forward, leaving the Company well positioned to benefit. Farm-belt consumers are looking better positioned, and significantly less debt-laden than their counterparts in most other parts of the country.

Given these very positive trends in its core markets, the Company faces an exciting and profitable future – but only if it is managed properly. We believe that it would be a tragedy for shareholders if this opportunity were to be lost due to continued loose management of critically important problem areas, exacerbated by a lack of proper management oversight by the board of directors. We are very concerned – given the current board and management’s weak track record, to date, in actually achieving what have been reasonable financial goals and forecasts – that a dramatic improvement in the Company’s financial performance may not be achievable under the current board of directors. Unless there is a significant positive change in the performance of the Company in the short term – as outlined at the beginning of this letter – it is our strongly held opinion that substantial change will be needed at the board level if the Company’s patient shareholders are to see the financial performance and stock value they deserve.

Finally, but importantly, I want to take this opportunity to remind each director of their fiduciary duties to the shareholders under law including the duty of oversight of management and to stress that we would hold any director personally responsible should we at any point in the future arrive at the opinion that there has been any breach of this duty.

Regards,

/s/ Raymond A. D. French

Raymond A. D. French

Chairman

Compare this map with a map showing the locations of the Company’s stores, as can be found on pages 4-5 of the Company’s 2004 Annual Report at: http://www.duckwall.com/Documents/AnnualReports/fiscal_04.pdf.

³¹	For a graph of the historical debt/assets ratio for the US Farm sector, see graph 11, page 10, in this March 2007 USDA report, “Prospects for the US Farm Economy”. Note also, graphs 3 and 4 on page 6:

http://www.usda.gov/oce/forum/2007%20Speeches/PDF%20speeches/KCollins_doc.pdf.

-----END PRIVACY-ENHANCED MESSAGE-----