Hancock boosts sales, profits in 1Q

Don Hogsett, May 26, 2003

With sales and margins both climbing higher, first-quarter profits at Hancock Fabrics, a diversified crafts and fabric retailer, climbed by 8.8 percent, to $4.1 million from $3.7 million last year.

Sales advanced by 3.4 percent, to $107.6 million from $104.1 million, somewhat beneath the company's expectations, stymied by weather and the war in Iraq. Same-store sales rose by 4.2 percent, compared with a 7.4 percent increase in the same period a year ago.

Larry Kirk, ceo, commented, "Earnings were reasonably good in the first quarter considering the effects of weather, war and weakness in the general retailing environment. Comparable-store sales were not as strong as expected, but repeated snow and ice storms in February hurt business and caused some key advertising promotions to be much less productive."

He added, "Sales were also down in the first week or so of the war. However, expenses as a percent of sales were even with a year ago, and gross margins were higher despite very promotional conditions in the industry and in retailing in general."

Lending strength to the bottom line, average gross margin improved by 40 basis points, or four-tenths of a percentage point, to 50.9 percent from 50.5 percent a year ago. Operating costs were steady at 43.5 percent. Advertising costs rose during the quarter, along with insurance and pension costs. But increases there, the company said, were offset by lower store payroll costs and fixed expenses were leveraged downward by the increase in same-store sales. A major expense, the retailer said, was the start-up of a new distribution center, and its impact on the company's costs is expected to continue throughout the year. "We will be contending with some duplication of costs until the transition from the existing facility to the new one is completed a year from now," said Kirk.

Hancock's balance sheet "is in good condition," said Kirk, "with $4 million of cash and $17 million in outstanding bank debt at quarter end. Some of the need for bank borrowings resulted from the early purchases of key fall imported merchandise in order to avoid sharp increases in ocean freight rates beginning May 1 and to guard against a potential shortage of shipping capacity later in the year."

Additionally, the company repurchased about 650,000 shares of its stock at a cost of $9 million, said Kirk. "Interest rates remain very low and easily justify further stock buybacks given the current dividend yield."

During the quarter, Hancock opened seven stores while closing six, and now operates 431 retail stores in 42 states. In addition to supplying various independent wholesale customers, Hancock operates an Internet store under its two domain names, hancockfabrics.com and homedecoratingaccents.com.

Hancock Fabrics Inc.

Qtr. 5/4 (x000) 2003 2002 % chg
a-First-quarter results include $17,000 in interest income, down 45.2 percent from $31,000 the preceding year.
Sales $107,636 $104,054 3.4
Oper. income (EBIT) 6,467 5,902 9.6
Net income 4,071a 3,741a 8.8
Per share (diluted) 0.22 0.20 10.0
Average gross margin 50.9% 50.5%
SG&A expenses 43.5% 43.5%

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