<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 28, 1996
----------------------------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
----------------- --------------------
COMMISSION FILE NUMBER 1-9482
------------------------------------------------
HANCOCK FABRICS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 64-0740905
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3406 WEST MAIN ST., TUPELO, MS 38803
(Address of principal executive offices)
(Zip Code)
(601) 842-2834
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of July 28, 1996, the registrant had outstanding an aggregate of 21,651,371
shares of common stock, $.01 par value.
<PAGE> 2
HANCOCK FABRICS, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (unaudited) Page Numbers
<S> <C>
Consolidated Balance Sheet as of July 28,1996 and January 28, 1996 3
Consolidated Statement of Earnings for the Thirteen Weeks and
Twenty-six Weeks Ended July 28, 1996 and July 30, 1995 4
Consolidated Statement of Changes in Shareholders' Equity for the
Twenty-six Weeks Ended July 28, 1996 5
Consolidated Statement of Cash Flows for the Twenty-six Weeks Ended
July 28, 1996 and July 30, 1995 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 10
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securityholders 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 12
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
(in thousands, except for July 28, January 28,
par value and numbers of shares) 1996 1996
- ------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,458 $ 5,026
Receivables, less allowance for doubtful accounts 1,470 1,025
Inventories 158,859 162,915
Deferred tax asset 1,462 3,114
Prepaid expenses 2,216 2,306
- ------------------------------------------------------------------------------------------
Total current assets 169,465 174,386
Property and equipment, at depreciated cost 18,819 19,462
Deferred tax asset 7,811 7,393
Other assets 578 594
- ------------------------------------------------------------------------------------------
Total assets $196,673 $201,835
==========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 37,772 $ 32,573
Accrued liabilities 14,623 14,717
Income taxes 2,104 4,192
- ------------------------------------------------------------------------------------------
Total current liabilities 54,499 51,482
Long-term debt obligations 20,000 30,000
Postretirement benefit liability other than pensions 18,500 17,784
Other deferred liabilities 2,516 2,148
- ------------------------------------------------------------------------------------------
Total liabilities 95,515 101,414
- ------------------------------------------------------------------------------------------
Commitments and contingencies
- ------------------------------------------------------------------------------------------
Common shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
27,324,272 and 26,962,115 issued and outstanding,respectively 273 270
Paid-in capital 21,193 18,238
Retained earnings 164,884 165,404
Less - Treasury stock, at cost, 5,672,901 and 5,454,097
shares held,respectively (81,468) (79,314)
Less - Deferred compensation on restricted stock
incentive plan (3,724) (4,177)
- ------------------------------------------------------------------------------------------
Total shareholders' equity 101,158 100,421
- ------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $196,673 $201,835
==========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 4
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(in thousands, except Thirteen Weeks Ended Twenty-six Weeks Ended
per share amounts) ---------------------- ------------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $82,780 $81,549 $174,409 $171,616
Cost of goods sold 41,947 42,290 91,373 91,399
- ------------------------------------------------------------------------------------------------------
Gross margin 40,833 39,259 83,036 80,217
- ------------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 37,526 36,431 75,748 73,785
Depreciation and amortization 928 968 1,891 1,966
Interest expense 320 561 738 1,077
Interest income (69) (107) (122) (202)
- ------------------------------------------------------------------------------------------------------
Total operating and interest expenses 38,705 37,853 78,255 76,626
Earnings before income taxes 2,128 1,406 4,781 3,591
Income taxes 816 563 1,833 1,450
- ------------------------------------------------------------------------------------------------------
Net earnings $ 1,312 $ 843 $ 2,948 $ 2,141
======================================================================================================
Weighted average number of common shares and
common equivalent shares outstanding 21,769 21,212 21,657 21,162
======================================================================================================
Net earnings per share $ 0.06 $ 0.04 $ 0.14 $ 0.10
======================================================================================================
Dividends per share $ 0.08 $ 0.08 $ 0.16 $ 0.16
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
numbers of shares) Common Stock Additional Treasury Stock Deferred Total
------------------- Paid-in Retained --------------------- Com- Shareholders'
Shares Amount Capital Earnings Shares Amount pensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Twenty-six weeks
- ------------------------------------------------------------------------------------------------------------------------------------
Balance January 28, 1996 26,962,115 $270 $18,238 $165,404 (5,454,097) $(79,314) $(4,177) $100,421
Net earnings 2,948 2,948
Cash dividend - $.08 per
share on a quarterly basis (3,468) (3,468)
Exercise of stock options 277,800 2 1,877 1,879
Issuance of restricted stock 115,700 1 1,161 (1,162) 0
Cancellation of restricted stock (39,800) (454) 451 (3)
Issuance of stock under nonemployee
directors stock compensation plan 8,457 85 85
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 286 1,164 1,450
Purchase of treasury stock (218,804) (2,154) (2,154)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance July 28, 1996 27,324,272 $273 $21,193 $164,884 (5,672,901) $(81,468) $(3,724) $101,158
====================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 6
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(in thousands) Twenty-six Weeks Ended
-------------------------
July 28, July 30,
1996 1995
- --------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,948 $2,141
Adjustments to reconcile net earnings to cash
from by operating activities
Depreciation and amortization 1,891 1,966
LIFO charge 2,000 1,500
Deferred income taxes 1,234 (574)
Amortization of deferred compensation on
restricted stock incentive plan 1,161 728
(Increase) decrease in assets
Receivables and prepaid expenses (355) 40
Inventory at current cost 2,056 (5,838)
Other noncurrent assets 16 (7)
Increase (decrease) in liabilities
Accounts payable 5,199 2,722
Accrued liabilities (94) (195)
Current income tax obligations (1,802) (3,624)
Postretirement benefit liability
other than pensions 716 712
Other deferred liabilities 368 (7)
- --------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 15,338 (436)
- --------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (1,248) (1,066)
- --------------------------------------------------------------------------------------
Net cash used in investing activities (1,248) (1,066)
- --------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term borrowings (repayments) (10,000) 6,000
Purchase of treasury stock (2,154) (173)
Proceeds from exercise of stock options 1,879 62
Stock plan for non-employee directors 85 72
Cash dividends paid (3,468) (3,445)
- --------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities (13,658) 2,516
- --------------------------------------------------------------------------------------
Increase in cash and cash equivalents 432 1,014
Beginning of period cash and cash equivalents 5,026 3,855
- --------------------------------------------------------------------------------------
End of period cash and cash equivalents $ 5,458 $4,869
======================================================================================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest 704 1,244
Income taxes 2,412 5,665
======================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 7
HANCOCK FABRICS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with the instructions to Form 10-Q and therefore do not include
all information and footnotes necessary for a fair presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. The statements do reflect all adjustments
(consisting of only normal recurring accruals) which are, in the opinion of
management, necessary for a fair presentation of financial position in
conformity with generally accepted accounting principles. The statements
should be read in conjunction with the Notes to the Consolidated Financial
Statements for the fiscal year ended January 28, 1996 incorporated into the
Company's Annual Report on Form 10-K.
The results of operations for the thirteen and twenty-six week periods are not
necessarily indicative of the results to be expected for the full fiscal year.
NOTE 2: EARNINGS PER SHARE
Earnings per share are based on the weighted average number of common shares
and common equivalent shares outstanding. Common equivalent shares represent
dilutive stock options and restricted stock shares, reduced by the number of
shares which could be repurchased at the average fair market value during the
periods indicated with the proceeds of the options and the income tax savings
available from recognizing compensation expense as a tax deduction.
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<PAGE> 8
HANCOCK FABRICS, INC.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
Historically, cash flow from operations has been sufficient to finance the
expansion and operation of Hancock's business. Hancock's principal capital
requirements are for the financing of inventories and to a lesser extent for
capital expenditures relating to store locations and its warehouse and
distribution facility. Hancock has also purchased treasury stock and paid
dividends to shareholders. Funds for such purposes are generated from
Hancock's operations and, if necessary, supplemented by borrowings from
commercial lenders. During 1996, Hancock plans to open approximately 20 units
and close or relocate approximately 35 stores resulting in a net decrease in
retail fabric stores. Hancock's management believes that redeploying
inventories and other assets from underperforming stores to new openings or
existing stores is a more effective utilization of assets during this period of
industry consolidation. Hancock continues to track and assess the contribution
of each store and the effect on total Company returns on sales and assets. As a
result, Hancock opened 2 stores and closed 7 stores during the thirteen weeks
ended July 28, 1996 for a total of 486 stores at period end.
During the thirteen weeks ended July 28, 1996, accounts payable increased due
to a the timing of payments to vendors and improvements in payment terms.
Despite the absorption of inventories from 12 net store closings, total
inventory decreased according to planned reductions in stock levels through
adjustments in the purchase and allocation of merchandise. The Company
currently has $20 million in outstanding borrowings, or just under 17% of total
capitalization, compared to $43 million in the same period last year.
RESULTS OF OPERATIONS
Thirteen weeks ended July 28, 1996 compared to thirteen weeks ended July 30,
1995
Sales increased to $82.8 million from $81.5 million in the same period of the
prior year. An increase of 3.4% in comparable store sales contributed to the
increase in sales. This comparable store sales gain was partially offset by a
$1.2 million net loss of sales from store openings and closing activity and
from wholesale sales declines.
-8-
<PAGE> 9
Net earnings were $1.3 million, or $.06 per share, compared with $843 thousand,
or $.04 per share, in the comparable period of the prior year. The increase in
earnings resulted from the higher sales volume and gross margins which offset
higher selling, general and administrative expenses.
Gross margin, as a percent of sales, increased to 49.3% from 48.1% in the
second quarter of 1995. Gross margins improved due to better inventory
management and sales price adjustments. The effect of LIFO for the thirteen
weeks ended July 28, 1996 and July 30, 1995 was a decrease in gross margin by
$1.0 million and $750 thousand, respectively.
Total operating and interest expenses as a percentage of sales increased to
46.8% from 46.4% in the second quarter of 1995. The increase is due to higher
selling, general and administrative expenses which included certain unusual
costs relating to retirement activity reduced by lower depreciation and
amortization, and interest expenses. Such additional levels of retirement
related costs will continue to be incurred over the remainder of the year.
Twenty-six weeks ended July 28, 1996 compared to twenty-six weeks ended July
30, 1995
Sales increased to $174.4 million or 1.6% over the same period of the prior
year. An increase of 3.2% in comparable store sales contributed to the
increase in sales. This comparable store sales gain was partially offset by a
$2.4 million net loss of sales from store opening and closing activity and from
wholesale sales declines.
Net earnings were $2.9 million compared to $2.1 million in the comparable
period of the prior year. The increase was due to higher gross margins which
offset an increase in operating expenses and a higher LIFO charge than in the
same period last year.
Gross margin increased to 47.6% from 46.7% in the twenty-six weeks of 1996.
The effect of LIFO for the twenty-six weeks ended July 28, 1996 and July 30,
1995 was a decrease in gross profit by $2.0 million and $1.5 million,
respectively.
Total operating and interest expense as a percentage of sales increased to
44.9% from 44.6% for the same period of the prior year due to higher selling,
general and administrative expenses which included certain unusual costs
relating to retirement activity. Depreciation and amortization and interest
expenses were lower than the comparable period of the prior year.
-9-
<PAGE> 10
EFFECT OF INFLATION
The impact of inflation on labor and occupancy costs can significantly affect
Hancock's operations. Many of Hancock's employees are paid hourly rates
related to the Federal minimum wage; accordingly, any increases affect Hancock.
Recently enacted Federal minimum wage hikes will have an adverse effect on
earnings although the impact cannot be readily quantified. In addition,
payroll taxes, employee benefits and other employee related costs continue to
increase. Costs of leases for new store locations have stabilized recently,
but renewal costs of older leases are higher. Taxes, maintenance and insurance
costs have also risen. Hancock believes that the current practice of
maintaining adequate operating margins through a combination of price
adjustments and cost controls, careful evaluation of occupancy needs and
efficient purchasing practices is the most effective tool for coping with
increasing costs and expenses.
SEASONALITY
The Company's business is slightly seasonal. Peak sales periods occur during
the fall and pre-Easter weeks, while the lowest sales periods occur during
preChristmas and mid-summer.
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<PAGE> 11
PART II. OTHER INFORMATION
HANCOCK FABRICS, INC.
Item 4. Submission of matters to a Vote of Security Holders
a. Registrant's Annual Meeting of Shareholders was held June 13,
1996.
b. Response may be omitted.
c. At the annual meeting, the shareholders approved the
registrant's 1996 Stock Option Plan, under which options for
up to 2 million shares of common stock may be issued over the
life of the plan to full-time employees, including officers
(11,816,083 affirmative votes, 5,165,584 negative votes,
127,501 abstentions and 1,745,485 not voted).
Also at the annual meeting, the shareholders approved the
registrant's 1995 Restricted Stock Plan, under which up to 1
million shares of common stock may be issued over the life of
the plan to full-time key employees, including officers
(12,149,429 affirmative votes, 4,880,342 negative votes,
129,397 abstentions and 1,745,485 not voted).
d. Inapplicable
Item 6. Exhibits and Reports of Form 8-K
(a) Exhibits -
11 Statement regarding computation of earnings per share
27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K -
None
-11-
<PAGE> 12
HANCOCK FABRICS, INC.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HANCOCK FABRICS, INC.
(Registrant)
By:/s/Larry D. Fair
------------------------------
Larry D. Fair
Vice President,
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: September 10, 1996
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<PAGE> 1
HANCOCK FABRICS, INC. EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for
per share amounts) Thirteen Weeks Ended Twenty-six Weeks Ended
------------------------ -------------------------
July 28, July 30, July 28, July 30,
1996 1995 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary earnings per share
Net earnings $ 1,312 $ 843 $ 2,948 $ 2,141
========== ========== ========== ==========
Weighted average number of common shares
outstanding during period 21,691,245 21,587,901 21,591,689 21,489,967
Additional shares attributable to common
stock equivalents 313,843 109,868 309,978 134,739
Shares attributable to tax effect of restricted stock
and related deferred compensation (236,365) (486,200) (244,703) (463,040)
---------- ---------- ---------- ----------
21,768,723 21,211,569 21,656,964 21,161,666
========== ========== ========== ==========
Earnings per share $ 0.06 $ 0.04 $ 0.14 $ 0.10
========== ========== ========== ==========
- ------------------------------------------------------------------------------------- ------------------------
Fully diluted earnings per share
Net earnings $ 1,312 $ 843 $ 2,948 $ 2,141
========== ========== ========== ==========
Weighted average number of common shares
outstanding during period 21,691,245 21,587,901 21,591,689 21,489,967
Additional shares attributable to common
stock equivalents 315,708 179,067 319,579 166,367
Shares attributable to tax effect of restricted stock
and related deferred compensation (236,365) (482,717) (244,633) (463,040)
---------- ---------- ---------- ----------
21,770,588 21,284,251 21,666,635 21,193,294
========== ========== ========== ==========
Earnings per share $ 0.06 $ 0.04 $ 0.14 $ 0.10
========== ========== ========== ==========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HANCOCK FABRICS, INC. FOR THE PERIOD ENDED JULY 28,
1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-02-1997
<PERIOD-START> JAN-29-1996
<PERIOD-END> JUL-28-1996
<CASH> 5,458
<SECURITIES> 0
<RECEIVABLES> 1,470
<ALLOWANCES> 0
<INVENTORY> 158,859
<CURRENT-ASSETS> 169,465
<PP&E> 18,819
<DEPRECIATION> 0
<TOTAL-ASSETS> 196,673
<CURRENT-LIABILITIES> 54,499
<BONDS> 0
0
0
<COMMON> 273
<OTHER-SE> 100,885
<TOTAL-LIABILITY-AND-EQUITY> 196,673
<SALES> 174,409
<TOTAL-REVENUES> 174,409
<CGS> 91,373
<TOTAL-COSTS> 77,935
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 320
<INCOME-PRETAX> 4,781
<INCOME-TAX> 1,833
<INCOME-CONTINUING> 2,948
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,948
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
</TABLE>
