<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 MAY 4, 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
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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 38808
(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 May 4, 1997, the registrant had outstanding an aggregate of 21,502,827
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 May 4, 1997 and February 2, 1997 3
Consolidated Statement of Earnings for the Thirteen Weeks ended
May 4, 1997 and April 28, 1996 4
Consolidated Statement of Changes in Shareholders' Equity for the
Thirteen Weeks ended May 4, 1997 5
Consolidated Statement of Cash Flows for the Thirteen Weeks ended
May 4, 1997 and April 28, 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 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 May 4, February 2,
share and per share amounts) 1997 1997
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,842 $ 6,870
Receivables, less allowance for doubtful accounts 1,695 1,102
Inventories 141,749 147,973
Deferred tax asset 3,007 2,761
Prepaid expenses 1,541 2,080
- --------------------------------------------------------------------------------------------------------
Total current assets 155,834 160,786
Property and equipment, at depreciated cost 17,410 17,845
Deferred tax asset 8,590 8,771
Other assets 427 441
- --------------------------------------------------------------------------------------------------------
Total assets $182,261 $187,843
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 36,484 $ 34,993
Accrued liabilities 14,846 16,533
Income taxes 3,546 6,302
- --------------------------------------------------------------------------------------------------------
Total current liabilities 54,876 57,828
Long-term debt obligations 0 3,000
Postretirement benefits other than pensions 19,384 19,163
Other liabilities 2,920 2,579
- --------------------------------------------------------------------------------------------------------
Total liabilities 77,180 82,570
- --------------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
27,694,497 and 27,342,472 issued and outstanding, respectively 277 273
Additional paid-in capital 25,562 21,369
Retained earnings 171,584 170,973
Treasury stock, at cost, 6,191,670 and 6,027,503
shares held, respectively (86,738) (84,820)
Deferred compensation on restricted stock
incentive plan (5,604) (2,522)
- --------------------------------------------------------------------------------------------------------
Total shareholders' equity 105,081 105,273
- --------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $182,261 $187,843
========================================================================================================
</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
per share amounts) Thirteen Weeks Ended
------------------------------------
May 4, April 28,
1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Sales $92,000 $91,629
Cost of goods sold 48,550 49,426
- -------------------------------------------------------------------------------------------------
Gross profit 43,450 42,203
- -------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 38,802 38,222
Depreciation and amortization 861 963
Interest expense 46 418
Interest income (62) (53)
- -------------------------------------------------------------------------------------------------
Total operating and interest expenses 39,647 39,550
- -------------------------------------------------------------------------------------------------
Earnings before taxes 3,803 2,653
Income taxes 1,464 1,017
- -------------------------------------------------------------------------------------------------
Net earnings $ 2,339 $1,636
=================================================================================================
Weighted average number of common shares and
common equivalent shares outstanding 21,361 21,477
=================================================================================================
Earnings per share $ 0.11 $ 0.08
=================================================================================================
Dividends per share $ 0.08 $ 0.08
=================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE> 5
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(in thousands, except for
number of shares) Common Stock Additional Treasury Stock Total
------------------- Paid-in Retained ---------------------- Deferred Shareholders'
Shares Amount Capital Earnings Shares Amount Compensation Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Thirteen weeks
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance February 2, 1997 27,342,472 $273 $21,369 $170,973 (6,027,503) $(84,820) $(2,522) $105,273
Net earnings 2,339 2,339
Cash dividend - $.08 per
share on a quarterly basis (1,728) (1,728)
Exercise of stock options 87,425 1 701 702
Restricted stock transactions 264,600 3 3,337 (3,340) 0
Amortization and vesting of deferred
compensation on restricted stock
incentive plan 155 258 413
Purchase of treasury stock (164,167) (1,918) (1,918)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance May 4, 1997 27,694,497 $277 $25,562 $171,584 (6,191,670) $(86,738) ($5,604) $105,081
====================================================================================================================================
</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)
Thirteen Weeks Ended
---------------------------
May 4, April 28,
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,339 $ 1,636
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 861 963
LIFO charge 500 1,000
Deferred income taxes (65) 1,780
Amortization of deferred compensation on
restricted stock incentive plan 258 359
(Increase) decrease in assets
Receivables and prepaid expenses (54) 323
Inventory reduction at current cost 5,724 4,804
Other noncurrent assets 14 (69)
Increase (decrease) in liabilities
Accounts payable 1,491 1,350
Accrued liabilities (1,687) (880)
Current income tax obligations (2,601) (3,087)
Postretirement benefits other
than pensions 221 348
Other liabilities 341 345
- ------------------------------------------------------------------------------------
Net cash provided by operating activities 7,342 8,872
- ------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (426) (703)
- ------------------------------------------------------------------------------------
Net cash used in investing activities (426) (703)
- ------------------------------------------------------------------------------------
Cash flows from financing activities:
Long-term debt repayments (3,000) (7,000)
Purchase of treasury stock (1,918) (143)
Proceeds from exercise of stock options 702 55
Cash dividends paid (1,728) (1,726)
- ------------------------------------------------------------------------------------
Net cash used in financing activities (5,944) (8,814)
- ------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 972 (645)
Cash and cash equivalents:
Beginning of period 6,870 5,026
- ------------------------------------------------------------------------------------
End of period $ 7,842 $ 4,381
====================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 25 $ 405
Income taxes $ 4,285 $ 2,324
====================================================================================
</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 February 2, 1997 incorporated into the Company's
Annual Report on Form 10-K.
The results of operations for the thirteen week period 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, in the first
quarter of 1997, the results of the computation of EPS under both methods are
the same.
-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. 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. Funds for
such purposes are generated from Hancock's operations and, if necessary,
supplemented by borrowings from commercial lenders. During 1997, Hancock plans
to open approximately 30 stores and close approximately 40. 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. Accordingly, Hancock opened 1 store and closed 11
stores during the thirteen weeks ended May 4, 1997 resulting in a total of 452
stores in operation at period end.
During the thirteen weeks ended May 4, 1997, an increase in accounts payable
provided cash of $1.5 million due to the timing of payments to vendors and
improvements in payment terms. Total inventory decreased $5.7 million for the
thirteen weeks compared to a $4.8 million decrease for the prior year. Planned
reductions in stock levels through adjustments in the purchase and allocation of
merchandise, together with decreases caused by seasonal factors and store
closings, caused the overall inventory decrease. In the first quarter of this
year, cash of $1.9 and $1.7 million was used to fund treasury stock purchases
and payment of dividends, respectively.
After repaying $3 million in the quarter just ended, the Company currently has
no outstanding borrowings, compared with $23 million in bank debt at the same
time last year.
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<PAGE> 9
RESULTS OF OPERATIONS
Thirteen weeks ended May 4, 1997 compared to thirteen weeks ended April 28, 1996
Net earnings were $2.3 million, or $.11 per share, compared with $1.6 million,
or $.08 per share, in the comparable period of the prior year. The increase in
earnings resulted from higher gross margins and lower interest costs, partially
offset by higher SG&A expenses.
Sales increased to $92.0 million from $91.6 million in the same period of the
prior year. An increase of 4.5% in comparable store sales was substantially
offset by a $3.4 million loss of sales from net store opening and closing
activity.
Gross margin increased to 47.2% from 46.1% in the first quarter of 1996 due to
better inventory management and improvements in the product mix. The effect of
LIFO for the thirteen weeks ended May 4, 1997 and April 28, 1996 was a decrease
in gross profit of $500 thousand and $1.0 million, respectively.
Total operating and interest expenses as a percentage of sales decreased to
43.1% from 43.2% in the first quarter of 1996. Interest expense was lower due to
the 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. Selling, general and administrative expenses were
higher, primarily due to mandated minimum wage increases.
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 will affect Hancock. In
addition, payroll taxes, employee benefits and other employee related costs
continue to increase. Costs of leases for new store locations remain stable, but
the renewal costs of older leases continue to increase. Taxes, maintenance and
insurance costs have also risen. Hancock believes the practice of maintaining
adequate operating margins through a combination of price adjustments and cost
controls, careful evaluation of occupancy needs and efficient purchasing
practices are the most effective tools for coping with increasing costs and
expenses.
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<PAGE> 10
Inflation is one of the key factors used in the calculation of the LIFO charge
to Cost of Sales. A slowing inflation trend in recent quarters, combined with
inventory reductions, has caused lower LIFO charges than in comparable periods
of prior years.
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 midsummer.
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 10Q 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 uncertainties include,
but are not limited to, those described above.
-10-
<PAGE> 11
PART II. OTHER INFORMATION
HANCOCK FABRICS, INC.
Item 4. Submission of matter to a vote of securityholders
(a) Registrant's Annual Meeting of Shareholders was held June
12, 1997.
(b) Proxies for the meeting were solicited pursuant to Regulation
14 under the Securities Exchange Act of 1934, there was no
solicitation in opposition to the management's nominees as
listed in the proxy statement, and such nominees were elected.
(c) The vote in the uncontested election of such nominees was as
follows: 18,810,884 votes cast for and 91,068 votes withheld
for Mr. Don Fruge and 18,818,796 votes cast for and 83,156
withheld for Mr. Larry G. Kirk.
(d) Inapplicable.
Item 6. Exhibits and Reports on 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
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: June 17, 1997
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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
-----------------------------
May 4, April 28,
1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Primary earnings per share
Net earnings $ 2,339 $ 1,636
=========== ===========
Weighted average number of common shares
outstanding during period 21,476,589 21,488,531
Additional shares attributable to common
stock equivalents 378,782 306,211
Shares attributable to tax effect of restricted stock
and related deferred compensation (493,958) (317,318)
----------- -----------
21,361,413 21,477,424
=========== ===========
Earnings per share $ 0.11 $ 0.08
=========== ===========
- --------------------------------------------------------------------------------------------------
Fully diluted earnings per share
Net earnings $ 2,339 $ 1,636
=========== ===========
Weighted average number of common shares
outstanding during period 21,476,589 21,488,531
Additional shares attributable to common
stock equivalents 409,216 422,454
Shares attributable to tax effect of restricted stock
and related deferred compensation (486,236) (281,093)
----------- -----------
21,399,569 21,629,892
=========== ===========
Earnings per share $ 0.11 $ 0.08
=========== ===========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HANCOCK FABRICS FOR THE THREE MONTHS ENDED
MAY 04, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> FEB-03-1997
<PERIOD-END> MAY-04-1997
<CASH> 7,842
<SECURITIES> 0
<RECEIVABLES> 1,695
<ALLOWANCES> 0
<INVENTORY> 141,749
<CURRENT-ASSETS> 155,834
<PP&E> 17,410
<DEPRECIATION> 0
<TOTAL-ASSETS> 182,261
<CURRENT-LIABILITIES> 54,876
<BONDS> 0
0
0
<COMMON> 277
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 104,804
<SALES> 92,000
<TOTAL-REVENUES> 92,000
<CGS> 48,550
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 39,601
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 3,803
<INCOME-TAX> 1,464
<INCOME-CONTINUING> 2,339
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,339
<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
