<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 OCTOBER 31, 1999
-----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 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 of other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
3406 WEST MAIN STREET, TUPELO, MS 38803
(Address of principal executive offices)
(Zip Code)
(662) 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 practical date.
As of October 31, 1999, the registrant had outstanding an aggregate of
18,989,596 shares of common stock, $.01 par value.
<PAGE> 2
HANCOCK FABRICS, INC.
INDEX
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements (unaudited) Page Numbers
<S> <C>
Consolidated Balance Sheet as of October 31, 1999 and
January 31, 1999 3
Consolidated Statement of Earnings for the Thirteen Weeks and Thirty-nine
Weeks Ended October 31, 1999 and November 1, 1998 4
Consolidated Statement of Shareholders' Equity for the Thirty-nine Weeks
Ended October 31, 1999 5
Consolidated Statement of Cash Flows for the Thirty-nine Weeks Ended
October 31, 1999 and November 1, 1998 6
Notes to Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 8 - 10
PART II. OTHER INFORMATION:
Item 3. Quantitative and Qualitative Disclosures about Market Risks 10
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURE 11
</TABLE>
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<PAGE> 3
PART I. FINANCIAL INFORMATION
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEET
(unaudited)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
(in thousands, except for October 31, January 31,
share and per share amounts) 1999 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 10,900 $ 6,959
Receivables, less allowance for doubtful accounts 1,761 1,595
Inventories 145,758 142,249
Prepaid expenses 3,712 3,775
- -----------------------------------------------------------------------------------------------------
Total current assets 162,131 154,578
Property and equipment, at depreciated cost 27,044 23,833
Deferred tax asset 11,688 10,703
Other assets 5,888 3,290
- -----------------------------------------------------------------------------------------------------
Total assets $ 206,751 $ 192,404
=====================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 45,900 $ 36,881
Accrued liabilities 14,870 14,104
Deferred tax liabilities 3,750 2,562
Income taxes 2,441 2,313
- -----------------------------------------------------------------------------------------------------
Total current liabilities 66,961 55,860
Long-term debt obligations 37,000 29,000
Postretirement benefits other than pensions 20,835 20,334
Reserve for store closings 4,149 6,079
Other liabilities 3,693 3,979
- -----------------------------------------------------------------------------------------------------
Total liabilities 132,638 115,252
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
29,139,726 and 28,547,826 issued and outstanding, respectively 291 285
Additional paid-in capital 39,134 35,133
Retained earnings 171,311 174,180
Treasury stock, at cost, 10,150,130 and 9,952,881
shares held, respectively (128,974) (127,867)
Deferred compensation on restricted stock
incentive plan (7,649) (4,579)
- -----------------------------------------------------------------------------------------------------
Total shareholders' equity 74,113 77,152
- -----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 206,751 $ 192,404
=====================================================================================================
</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 Thirty-nine Weeks Ended
----------------------------------- ------------------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales $98,962 $103,058 $278,175 $286,226
Cost of goods sold 49,386 51,946 143,236 146,235
- ---------------------------------------------------------------------------------------------------------------------------------
Gross profit 49,576 51,112 134,939 139,991
- ---------------------------------------------------------------------------------------------------------------------------------
Expenses (income)
Selling, general and administrative 43,746 43,987 125,205 126,559
Depreciation and amortization 1,207 1,073 3,525 2,980
Interest expense 789 564 1,953 1,044
Interest income (71) (94) (188) (171)
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating and interest expenses 45,671 45,530 130,495 130,412
- ---------------------------------------------------------------------------------------------------------------------------------
Earnings before taxes 3,905 5,582 4,444 9,579
Income taxes 1,406 2,027 1,600 3,475
- ---------------------------------------------------------------------------------------------------------------------------------
Net earnings and comprehensive income $ 2,499 $ 3,555 $ 2,844 $ 6,104
=================================================================================================================================
Earnings per share
Basic $ 0.14 $ 0.18 $ 0.16 $ 0.30
Diluted $ 0.14 $ 0.18 $ 0.16 $ 0.30
=================================================================================================================================
Weighted average shares outstanding
Basic 18,059 19,443 18,109 20,118
Diluted 18,059 19,531 18,109 20,440
=================================================================================================================================
Dividends per share $ 0.10 $ 0.10 $ 0.30 $ 0.30
=================================================================================================================================
</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 Deferred Total
----------------- Paid-in Retained --------------------- Compensation Shareholders'
Shares Amount Capital Earnings Shares Amount Equity
- ------------------------------------------------------------------------------------------------------------------------------------
Thirty-nine weeks ended October 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 31, 1999 28,547,826 $285 $35,133 $174,180 (9,952,881) ($127,867) ($4,579) $77,152
Net earnings 2,844 2,844
Cash dividend - $.10 per
share on a quarterly basis (5,713) (5,713)
Exercise of stock options
Restricted stock transactions 595,600 6 4,126 (4,132) 0
Amortization and vesting of deferred
compensation on restricted stock
incentive plan (99) 1,036 937
Cancellation of restricted stock (3,700) (26) 26
Purchase of treasury stock (197,249) (1,107) (1,107)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance October 31, 1999 29,139,726 $291 $39,134 $171,311 (10,150,130) ($128,974) ($7,649) $74,113
=================================================================================================================================
</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)
Thirty-nine Weeks Ended
-----------------------------
October 31, November 1,
1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 2,844 $ 6,104
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 3,525 2,980
LIFO charge (credit) (600) (300)
Deferred income taxes (985) 7,709
Amortization of deferred compensation on
restricted stock incentive plan 1,036 996
(Increase) decrease in assets
Receivables and prepaid expenses (103) (1,087)
Inventory at current cost (2,909) (5,909)
Income tax refundable (3,568)
Other noncurrent assets (2,598) (1,255)
Increase (decrease) in liabilities
Accounts payable 9,019 7,760
Accrued liabilities 766 (2,035)
Current income tax obligations 1,217 (3,435)
Postretirement benefits other than pensions 501 398
Reserve for closed stores (1,930)
Other liabilities (286) 289
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) operating activities 9,497 8,647
- ---------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (6,878) (6,024)
Dispositions of property and equipment 142 66
Other (914)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (6,736) (6,872)
- ---------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit agreement 8,000 26,000
Purchase of treasury stock (1,107) (19,609)
Proceeds from exercise of stock options 1,724
Shares issued under director's stock plan 72
Cash dividends paid (5,713) (6,159)
- ---------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 1,180 2,028
- ---------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 3,941 3,803
Cash and cash equivalents:
Beginning of period 6,959 7,057
- ---------------------------------------------------------------------------------------------
End of period $10,900 $ 10,860
=============================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,551 $ 682
Income taxes $ 2,507 $ 2,586
=============================================================================================
</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 of Hancock Fabrics,
Inc. ("Hancock" or the "Company") 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
31, 1999 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
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue common stock
were exercised or converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the Company.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
(dollars in thousands, except for Thirteen Weeks Ended Thirty-nine Weeks Ended
per share amounts) ---------------------------- ---------------------------
October 31, November 1, October 31, November 1,
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share
Net earnings $ 2,499 $ 3,555 $ 2,844 $ 6,104
=========== =========== =========== ===========
Weighted average number of common shares
outstanding during period 18,059,270 19,442,658 18,109,363 20,118,396
=========== =========== =========== ===========
Basic earnings per share $ 0.14 $ 0.18 $ 0.16 $ 0.30
=========== =========== =========== ===========
Diluted earnings per share
Net earnings $ 2,499 $ 3,555 $ 2,844 $ 6,104
=========== =========== =========== ===========
Weighted average number of common shares
outstanding during period 18,059,270 19,442,658 18,109,363 20,118,396
Common stock equivalents 0 88,460 0 254,431
Contingently issuable shares 0 0 0 67,597
----------- ----------- ----------- -----------
18,059,270 19,531,118 18,109,363 20,440,424
=========== =========== =========== ===========
Diluted earnings per share $ 0.14 $ 0.18 $ 0.16 $ 0.30
=========== =========== =========== ===========
</TABLE>
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<PAGE> 8
NOTE 3: RESERVE FOR STORE CLOSINGS
During the fourth quarter of 1998, the Company recorded a charge of $8,604,000
for revised estimates of net lease obligations for stores closed at January 31,
1999 and stores committed to closing in fiscal 1999. This charge, when combined
with an already existing reserve, resulted in a total reserve of $9,022,000 at
January 31, 1999. The remaining reserve for store closings at October 31, 1999
represents future net lease obligations required for the locations that have
been closed.
The 1999 activity in this reserve is as follows:
<TABLE>
<CAPTION>
Payments on Imputed
(in thousands) January 31, 1999 Reserve Interest October 31, 1999
---------------- ------------ -------- ----------------
<S> <C> <C> <C> <C>
Reserve for store 9,022 (2,199) 269 7,092
closings (current and
non-current)
</TABLE>
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. Hancock opened 26 stores and
closed 20 stores during the thirteen weeks ended October 31, 1999 resulting in a
total of 452 stores at period end.
During the thirty-nine weeks ended October 31, 1999 net earnings, bank
borrowings and cash generated from higher accounts payable were used to fund
additions to property and equipment of $6.7 million, a seasonal inventory
increase of $2.9 million, dividend payments of $5.7 million and $1.1 million of
treasury stock repurchases.
Hancock acquired, for approximately $2.5 million in cash, certain leases of
Mae's Fabrics for 30 stores operating in nine Mid-Atlantic states. Hancock began
taking possession of the store properties in July 1999 and all but one was in
operation by the end of November. Hancock expects to have the remaining store in
operation by the end of the fiscal year.
RESULTS OF OPERATIONS
Thirteen weeks ended October 31, 1999 compared to thirteen weeks ended November
1, 1998
Net earnings were $2.5 million, or $.14 per share, compared with $3.6 million,
or $.18 a share in the same period of the prior year. The decrease in earnings
resulted from a decrease in comparable store sales and higher operating expenses
as a percentage of sales.
Sales decreased to $99.0 million from $103.1 million in the same period of the
prior year, as the result of a decrease of .7% in comparable store sales and a
$3.4 million decrease in sales from net store opening and closing activity.
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<PAGE> 9
Gross margins improved to 50.1% from 49.6% in the last year's third quarter,
recovering from the effects of price deflation of goods that has occurred in the
last few quarters.
In the third quarter of 1999, total selling, general and administrative expenses
as a percentage of sales increased to 44.2% from 42.7% due to the lack of
leverage from negative comparable store sales and higher payroll costs caused by
the tight labor market. Delays in the openings of the acquired Mae's Fabrics
stores due to Mae's bankruptcy filing resulting in preopening expenses that were
approximately $400 thousand in excess of normal expense ratios, because of the
reduced period of time that sales could be generated during the quarter.
Interest expense increased to a slightly higher average debt level and increased
interest rates from the same period of the prior year.
Thirty-nine weeks ended October 31, 1999 compared to thirty-nine weeks ended
November 1, 1998
Net earnings were $2.8 million, or $.16 per share, compared with $6.1 million,
or $.30 a share in the same period of the prior year. The decrease in earnings
resulted from a lower comparable store sales increase and higher operating
expenses as a percent of sales.
Sales decreased to $278.2 million from $286.2 million last year. Comparable
store sales increased .3% but were more than offset by an $8.7 million reduction
in sales from store opening and closing activity.
Gross margins decreased to 48.5% in the first thirty-nine weeks of 1999 from
48.9% in the comparable period of 1998 due to more promotions designed to drive
sales during this period of deflation.
Selling, general and administrative expenses as a percentage of sales increased
to 45.0% from 44.2% in last year's thirty-nine week period due to the lack of
leverage from low comparable store sales and higher payroll costs caused by the
tight labor market.
Interest expense was higher due to higher average debt levels resulting from
treasury stock repurchases and increased interest rates from the same period of
the prior year.
EFFECTS 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
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 is the most effective tool for coping with increasing costs and
expenses.
Inflation is one of the key factors used in the calculation of the LIFO charge
to Cost of Sales. A deflationary trend in product costs in recent quarters,
combined with inventory reductions, has caused LIFO credits.
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<PAGE> 10
SEASONALITY
The Company's business is slightly seasonal. Peak sales periods occur in the
fall and pre-Easter weeks, while the lowest sales periods occur during the
summer and the month of January.
YEAR 2000 IMPACT
Hancock recognizes the potential impact that the year-2000 issue may have
relative to its computer systems and has implemented an action plan to ensure
that all systems will be fully year-2000 compliant. The action plan includes a
combination of modifications that have been substantially completed internally
or through software upgrades from Hancock's software vendors.
The Company has now completed the remediation and testing of its systems. The
total cost associated with the year-2000 issue was less than $100,000, all of
which was expensed as incurred.
Hancock has also communicated with all its significant merchandise suppliers and
service providers to determine the extent to which Hancock is vulnerable to
those third parties to remediate their own year-2000 issues. Although the
failure by other companies to timely convert their systems would have an
insignificant impact on Hancock's systems (because of limited interface), there
can be no assurance that such failure would not impair these companies' ability
to supply Hancock with merchandise or service on a timely basis.
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, general economic trends, changes in
consumer demand or purchase patterns, delays or interruptions in the flow of
merchandise between the Company's suppliers and/or its distribution center and
its stores, a disruption in the Company's data processing services 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.
PART II. OTHER INFORMATION:
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has no holding of derivative financial or commodity instruments at
October 31, 1999. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Company's Revolving Credit
Agreement bear interest at a negotiated rate, a floating rate (the higher of the
federal funds rate plus 1/2% or the prime rate), a rate derived from the Money
Market Rate, or a rate derived from the London Interbank Offered Rate. An
increase in interest rates of 100 basis points would not significantly affect
the Company's income. All of the Company's business is transacted in U. S.
dollars and, accordingly, foreign exchange rate fluctuations have never had a
significant impact on the Company, and they are not expected to in the
foreseeable future.
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<PAGE> 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule (only submitted to SEC in electronic
format).
(b) Reports on Form 8-K
None
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)
December 13, 1999
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF HANCOCK FABRICS, INC. FOR THE NINE MONTHS ENDED OCTOBER
31, 1999 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> JAN-30-2000
<PERIOD-START> FEB-01-1999
<PERIOD-END> OCT-31-1999
<CASH> 10,900
<SECURITIES> 0
<RECEIVABLES> 1,761
<ALLOWANCES> 0
<INVENTORY> 145,758
<CURRENT-ASSETS> 162,131
<PP&E> 27,044
<DEPRECIATION> 0
<TOTAL-ASSETS> 206,751
<CURRENT-LIABILITIES> 66,961
<BONDS> 0
0
0
<COMMON> 291
<OTHER-SE> 73,822
<TOTAL-LIABILITY-AND-EQUITY> 206,751
<SALES> 278,175
<TOTAL-REVENUES> 278,175
<CGS> 143,236
<TOTAL-COSTS> 143,236
<OTHER-EXPENSES> 128,542
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,953
<INCOME-PRETAX> 4,444
<INCOME-TAX> 1,600
<INCOME-CONTINUING> 2,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,844
<EPS-BASIC> .16
<EPS-DILUTED> .16
</TABLE>
