<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 NOVEMBER 2, 1997
-----------------------------
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 November 2, 1997, the registrant had outstanding an aggregate of
20,976,629 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 November 2, 1997 and February 2, 1997 3
Consolidated Statement of Earnings for the Thirteen Weeks and Thirty-nine
Weeks Ended November 2, 1997 and October 27, 1996 4
Consolidated Statement of Shareholders' Equity for the Thirty-nine Weeks
Ended November 2, 1997 5
Consolidated Statement of Cash Flows for the Thirty-nine Weeks Ended
November 2, 1997 and October 27, 1996 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 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 11
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
(in thousands, except for November 2, February 2,
share and per share amounts) 1997 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,641 $ 6,870
Receivables, less allowance for doubtful accounts 1,687 1,102
Inventories 146,993 147,973
Deferred tax asset 3,013 2,761
Prepaid expenses 3,422 2,080
- --------------------------------------------------------------------------------------------------------------------------
Total current assets 160,756 160,786
Property and equipment, at depreciated cost 16,924 17,845
Deferred tax asset 8,926 8,771
Other assets 317 441
- --------------------------------------------------------------------------------------------------------------------------
Total assets $186,923 $187,843
==========================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 35,488 $ 34,993
Accrued liabilities 14,776 16,533
Income taxes 5,390 6,302
- --------------------------------------------------------------------------------------------------------------------------
Total current liabilities 55,654 57,828
Long-term debt obligations 7,000 3,000
Postretirement benefits other than pensions 19,821 19,163
Other liabilities 3,120 2,579
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities 85,595 82,570
- --------------------------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
27,948,113 and 27,342,472 issued and outstanding, respectively 279 273
Additional paid-in capital 28,130 21,369
Retained earnings 174,374 170,973
Treasury stock, at cost, 6,971,484 and 6,027,503
shares held, respectively (96,530) (84,820)
Deferred compensation on restricted stock
incentive plan (4,925) (2,522)
- --------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 101,328 105,273
- --------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $186,923 $187,843
==========================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE> 4
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
(in thousands, except
per share amounts) Thirteen Weeks Ended Thirty-nine Weeks Ended
------------------------------------------------------------------------
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $96,459 $94,369 $268,413 $268,778
Cost of goods sold 48,486 47,441 136,917 138,814
- -----------------------------------------------------------------------------------------------------------------------------------
Gross profit 47,973 46,928 131,496 129,964
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 39,143 39,397 114,488 115,145
Depreciation and amortization 786 964 2,459 2,855
Interest expense 114 343 209 1,081
Interest income (48) (55) (180) (177)
- -----------------------------------------------------------------------------------------------------------------------------------
Total operating and interest expenses 39,995 40,649 116,976 118,904
- -----------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes 7,978 6,279 14,520 11,060
Income taxes 3,054 2,401 5,568 4,234
- -----------------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,924 $ 3,878 $ 8,952 $ 6,826
===================================================================================================================================
Weighted average number of common shares and
common equivalent shares outstanding 21,184 21,496 21,377 21,617
===================================================================================================================================
Earnings per share $0.23 $0.18 $0.42 $0.32
===================================================================================================================================
Dividends per share $0.10 $0.08 $0.18 $0.16
===================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-4-
<PAGE> 5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
number of shares) Common Stock Additional
-------------------------------- Paid-in Retained
Shares Amount Capital Earnings
- -------------------------------------------------------------------------------------------------------------------------
Thirty-nine weeks
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance February 2, 1997 27,342,472 $273 $21,369 $170,973
Net earnings 8,952
Cash dividend - $.08 per share for the
1st and 2nd quarters, $.10 per share (5,551)
for the 3rd quarter
Exercise of stock options 334,420 3 2,631
Restricted stock transactions 264,600 3 3,337
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 715
Issuance of shares under directors'
stock plan 6,621 78
Purchase of treasury stock
- -------------------------------------------------------------------------------------------------------------------------
Balance November 2, 1997 27,948,113 $279 $28,130 $174,374
=========================================================================================================================
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
(in thousands, except for
number of shares) Treasury Stock Deferred Total
-------------------------- Com- Shareholders'
Shares Amount pensation Equity
- ----------------------------------------------------------------------------------------------------------------------
Thirty-nine weeks
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance February 2, 1997 (6,027,503) ($84,820) ($2,522) $105,273
Net earnings 8,952
Cash dividend - $.08 per share for the
1st and 2nd quarters, $.10 per share (5,551)
for the 3rd quarter
Exercise of stock options 2,634
Restricted stock transactions (3,340) 0
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 937 1,652
Issuance of shares under directors'
stock plan 78
Purchase of treasury stock (943,981) (11,710) (11,710)
- --------------------------------------------------------------------------------------------------------------------
Balance November 2, 1997 (6,971,484) ($96,530) ($4,925) $101,328
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE> 6
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
(in thousands)
Thirty-nine Weeks Ended
---------------------------------------
November 2, October 27,
1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $8,952 $6,826
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 2,459 2,855
LIFO charge 0 2,750
Deferred income taxes (407) 1,043
Amortization of deferred compensation on
restricted stock incentive plan 937 1,755
(Increase) decrease in assets
Receivables and prepaid expenses (1,927) (1,608)
Inventory reduction at current cost 980 (138)
Other noncurrent assets 124 67
Increase (decrease) in liabilities
Accounts payable 495 6,627
Accrued liabilities (1,757) 824
Current income tax obligations (197) (77)
Postretirement benefits other than pensions 658 1,080
Other liabilities 541 197
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 10,858 22,201
- --------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (1,976) (1,935)
Dispositions of property and equipment 438 65
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,538) (1,870)
- --------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt borrowing (repayment) 4,000 (15,000)
Purchase of treasury stock (11,710) (3,027)
Proceeds from exercise of stock options 2,634 1,946
Shares issued under director's stock plan 78 85
Cash dividends paid (5,551) (5,201)
- --------------------------------------------------------------------------------------------------
Net cash used in financing activities (10,549) (21,197)
- --------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,229) (866)
Cash and cash equivalents:
Beginning of period 6,870 5,026
- --------------------------------------------------------------------------------------------------
End of period $5,641 $4,160
==================================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $78 $1,053
Income taxes $7,080 $3,292
==================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
-6-
<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 complete 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 February 2, 1997 incorporated into the Company's
Annual Report on Form 10-K.
The results of operations for the thirteen and thirty-nine 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.
In February, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share (EPS)" to be
effective for financial statements issued after December 15, 1997.
Implementation of SFAS No. 128 may cause the total EPS for the year to be
different than the sum of earlier reporting periods; however, no adjustments
will be required to interim periods prior to implementation.
-7-
<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. Funds for such purposes are generated from Hancock's
operations and, if necessary, supplemented by borrowings from commercial
lenders. In addition to cash dividends, Hancock has historically used excess
cash and, if necessary, borrowings from commercial lenders to purchase treasury
stock as market and financial conditions dictate. During 1997, Hancock plans to
open approximately 20 retail fabric stores and close or relocate approximately
45. Hancock's management believes that redeploying inventories and other assets
from underperforming stores to new locations or existing stores is a more
effective utilization of assets, particularly 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. Accordingly,
Hancock opened 6 stores and closed 8 during the thirteen weeks ended November 2,
1997 resulting in a total of 438 stores at period end.
On November 12, 1997, Hancock announced the completion of the acquisition of
forty-eight Northwest Fabrics & Crafts stores from Silas Creek Retail, L.P. The
Northwest stores are located in five new states and provides thirty-five new
markets for Hancock.
Hancock Fabrics announced December 2, 1997 that it acquired a minority interest
in Apparel Exchange, LLC. Apparel Exchange, based in Atlanta, GA, is the leading
internet electronic commerce developer for the textile and apparel industry.
During the thirty-nine weeks ended November 2, 1997, an increase in accounts
payable provided cash of $500 thousand due to the timing of payments to vendors.
Total inventory decreased $1.0 million for the thirty-nine weeks. Reductions in
stock levels through store closings were partially offset by traditional
seasonal increases in the third quarter. At November 2, 1997, Company had $7
million in outstanding debt, or about 6% of total capitalization, compared to
$15 million at the same time last year.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Thirteen weeks ended November 2, 1997 compared to thirteen weeks ended
October 27, 1996
- --------------------------------------------------------------------------------
Net earnings were $4.9 million, or $.23 per share, compared with $3.9 million,
or $.18 per share, for the comparable period of the prior year. The increase in
earnings resulted from higher sales and lower operating and interest costs.
Sales increased to $96.5 million from $94.3 million in the same period of the
prior year. An increase of 5.4% in comparable store sales was partially offset
by a $2.6 million net reduction in sales from net store opening and closing
activity.
-8-
<PAGE> 9
The gross margin was 49.7% in the third quarters of 1997 and 1996. Reductions in
inventory levels and the lack of inflation resulted in a $500 thousand credit in
LIFO for the third quarter of 1997. For the same period of the prior year, a
LIFO charge reduced gross profit by $750 thousand.
Total operating and interest expenses decreased as a percentage of sales to
41.5% from 43.1% in the third quarter of 1996. Selling, general and
administrative expenses were lower as a percentage of sales due to the operating
leverage associated with comparable store sales gains of 5.4% and one-time
retirement costs of $500 thousand in the third quarter of 1996. Interest expense
was lower due to debt reductions resulting from improved earnings and the
Company's efforts to improve asset productivity through the closing of
underperforming stores and better inventory management.
Thirty-nine weeks ended November 2, 1997 compared to thirty-nine weeks ended
October 27, 1996
- --------------------------------------------------------------------------------
Net earnings were $9.0 million, or $.42 per share, compared to $6.8 million, or
$.32 per share, in the same period of the prior year. The increase in earnings
was due to a higher gross margin and lower operating expenses and interest
costs.
Sales decreased to $268.4 million from $268.8 million in the same period of the
prior year. Comparable store sales gains of 4.4% were offset by an $11.1 million
net reduction in sales from store opening and closing activity.
The gross margin increased to 49.0% from 48.4% in the prior year. The effect of
LIFO for the thirty-nine weeks ended November 2, 1997 resulted in no charge to
earnings as compared to a decrease in gross profit of $2.75 million for the
thirty-nine weeks ended October 27, 1996.
Total operating and interest expenses, as a percentage of sales, decreased to
43.6% from 44.2% in the same period of the prior year. Selling, general and
administrative expenses as a percentage of sales were lower due to the operating
leverage associated with comparable store sales gains of 4.4% and one-time
retirement costs in 1996 totaling $1.2 million. Interest expense was lower due
to debt reductions resulting from improved earnings and the Company's efforts to
improve asset productivity through the closing of underperforming stores and
better inventory management.
- --------------------------------------------------------------------------------
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. 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.
-9-
<PAGE> 10
- --------------------------------------------------------------------------------
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
pre-Christmas and mid-summer.
- --------------------------------------------------------------------------------
FORWARD - LOOKING STATEMENTS
- --------------------------------------------------------------------------------
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain qualifying forward-looking statements. Certain information included
in this Form 10-Q contains statements that are forward-looking, such as
statements related to financial items and results, plans for future expansion,
store closure and other business development activities, capital spending or
financing sources, capital structure, stability of interest rates during periods
of borrowings and the effects of regulation and competition. Such
forward-looking information involves important risks and uncertainties that
could significantly impact anticipated results in the future. Accordingly, such
results may differ materially from those expressed in any forward-looking
statements by or on behalf of Hancock. These risks and uncertainities include,
but are not limited to, those described above.
-10-
<PAGE> 11
PART II. OTHER INFORMATION
HANCOCK FABRICS, INC.
- --------------------------------------------------------------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits -
11 Statement regarding computation of earnings per share
27 Financial Data Schedule (SEC Use Only)
(b) Reports on Form 8-K -
None
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/ Bruce D. Smith
-----------------------------
Bruce D. Smith
Senior Vice President, and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
Date: December 16, 1997
-11-
<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 Thirty-nine Weeks Ended
-----------------------------------------------------------------------
November 2, October 27, November 2, October 27,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary earnings per share
Net earnings $ 4,924 $ 3,878 $ 8,952 $ 6,826
============ ============ ============ ============
Weighted average number of common shares
outstanding during period 21,241,908 21,658,146 21,424,876 21,611,022
Additional shares attributable to common
stock equivalents 365,772 99,405 379,788 239,549
Shares attributable to tax effect of restricted stock
and related deferred compensation (423,787) (261,100) (427,635) (233,884)
------------ ------------ ------------ ------------
21,183,893 21,496,451 21,377,029 21,616,687
============ ============ ============ ============
Earnings per share $ 0.23 $ 0.18 $ 0.42 $ 0.32
============ ============ ============ ============
- ------------------------------------------------------------------------------------------------------------------------------------
Fully diluted earnings per share
Net earnings $ 4,924 $ 3,878 $ 8,952 $ 6,826
============ ============ ============ ============
Weighted average number of common shares
outstanding during period 21,241,908 21,658,146 21,424,876 21,611,022
Additional shares attributable to common
stock equivalents 426,569 108,580 450,140 247,802
Shares attributable to tax effect of restricted stock
and related deferred compensation (409,312) (258,743) (409,312) (234,033)
------------ ------------ ------------ ------------
21,259,165 21,507,983 21,465,704 21,624,791
============ ============ ============ ============
Earnings per share $ 0.23 $ 0.18 $ 0.42 $ 0.32
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HANCOCK FABRICS, INC. FOR THE NINE MONTH PERIOD ENDED
NOVEMBER 2, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> FEB-1-1998
<PERIOD-START> FEB-3-1997
<PERIOD-END> NOV-2-1997
<CASH> 5,641
<SECURITIES> 0
<RECEIVABLES> 1,687
<ALLOWANCES> 0
<INVENTORY> 146,993
<CURRENT-ASSETS> 160,756
<PP&E> 16,924
<DEPRECIATION> 0
<TOTAL-ASSETS> 186,923
<CURRENT-LIABILITIES> 55,654
<BONDS> 0
0
0
<COMMON> 279
<OTHER-SE> 101,049
<TOTAL-LIABILITY-AND-EQUITY> 186,923
<SALES> 268,413
<TOTAL-REVENUES> 268,413
<CGS> 136,917
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 116,767
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 209
<INCOME-PRETAX> 14,520
<INCOME-TAX> 5,568
<INCOME-CONTINUING> 8,952
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,952
<EPS-PRIMARY> .42
<EPS-DILUTED> .42
</TABLE>
