Hancock succeeds by breaking even

Retailer finalizing leases on 15 new stores

Don Hogsett, August 27, 2001

Holding its own in a persistently weak retail environment, Hancock Fabrics Inc. reported virtually flat sales and earnings during the second quarter, with deep cuts in interest costs helping to stabilize the bottom line.

Propped up by sharply lower borrowing costs, the fabric and crafts retailer recorded a second-quarter profit of $590,000, up a skimpy .01 percent from the $582,999 in year-ago earnings.

Helping the retailer to hold the line, interest expense was whittled down by 39.5 percent, to $417,000 from $689,000 the prior year, a cash savings of $272,000.

Sales were similarly flat, edging up just 0.9 percent, to $86.8 million from $86.0 million last year. Same-store sales gained by 2.4 percent, compared with a 4.8 percent increase in the year-before period.

Larry Kirk, Hancock ceo, commented, "The seasonally slow summer quarter was slightly ahead of last year in both sales and earnings. Gross margins were good, particularly in the current environment, but were slightly lower than a year ago. Expenses were only marginally higher than last year … We are dealing fairly well with inventory liquidations that are occurring within our industry and the continuing distress in the broader economy."

Kirk added, "Our business is somewhat defensive against economic weakness, albeit in different product categories than in years past, but we are not totally immune. However, a large portion of our product mix is now in categories such as home decorating and special occasion wear — bridal, party and prom — which offer higher quality at greater economy than ready-made products, and in groups such as quilting, which are not usually price-sensitive."

While waiting for a turn in the economy, said Kirk, "We will aggressively install the Waverly home decorating concept, which is now in 109 stores, and enhance presentations in the key quilting category. The recently added line of home accent products continues to grow … and an expanded bridal goods program is also being introduced. In short, we are enhancing our offerings in higher-growth product groups within our core business."

Hancock's balance sheet remains "in good shape," Kirk added, "with bank debt of $27 million, or 24 percent of total capitalization, at what is likely the high-water mark of the year. We are using excess cash flow to fund the home decorating initiative, improve merchandise assortments in growth categories and accelerate unit expansion. At present, we are finalizing leases on 15 store locations from bankruptcy situations, all of which we expect will be in operation before yearend."

During the second quarter, Hancock opened seven stores and closed 10, for a net 436 units in 42 states.

Hancock Fabrics

Qtr. 7/29 (x000) 2001 2000 % CHG
Sales $86,815 $86,046 0.9
Oper. income (EBIT) 1,317 1,539 -14.4
Net income 590 582 0.1
Per share (diluted) 0.03 0.03 0.0
Average gross margin 50.4% 50.5%
SG&A expenses 48.8% 48.7%
Six months
Sales 184,431 184,169 0.1
Oper. income (EBIT) 5,581 5,611 0.5
Net income 3,078 2,765 1.1
Per share (diluted) 0.18 0.16 1.3
Average gross margin 50.0% 49.7%
SG&A expenses 46.9% 46.6%

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