<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 29, 2000
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 29, 2000, the registrant had outstanding an aggregate of
17,275,611 shares of common stock, $.01 par value.
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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 29, 2000 and January 30, 2000 3
Consolidated Statement of Earnings for the Thirteen Weeks and
Thirty-nine Weeks Ended October 29, 2000 and October 31, 1999 4
Consolidated Statement of Shareholders' Equity for the
Thirty-nine Weeks Ended October 29, 2000 5
Consolidated Statement of Cash Flows for the Thirty-nine
Weeks Ended October 29, 2000 and October 31, 1999 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 2. Recent Issuances of Unregistered Securities 10
Item 3. Quantitative and Qualitative Disclosures about Market Risks 11
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>
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(in thousands, except for October 29, January 30,
share and per share amounts) 2000 2000
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 5,035 $ 6,904
Receivables, less allowance for doubtful accounts 614 2,347
Inventories 138,961 140,750
Prepaid expenses 2,054 2,720
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Total current assets 146,664 152,721
Property and equipment, at depreciated cost 26,232 26,947
Deferred tax asset 9,245 10,091
Pension payment in excess of required contribution 3,078
Other assets 7,104 5,803
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Total assets $ 192,323 $ 195,562
========================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 42,323 $ 39,072
Accrued liabilities 17,185 13,344
Deferred tax liabilities 5,147 3,438
Income taxes 1,573 2,832
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Total current liabilities 66,228 58,686
Long-term debt obligations 21,000 31,000
Postretirement benefits other than pensions 21,292 20,895
Reserve for store closings 2,206 4,161
Other liabilities 4,455 3,953
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Total liabilities 115,181 118,695
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Commitments and contingencies
Shareholders' equity:
Common stock, $.01 par value; 80,000,000 shares authorized;
29,180,814 and 29,139,726 issued and outstanding, respectively 292 291
Additional paid-in capital 39,050 39,142
Retained earnings 179,314 174,815
Treasury stock, at cost, 11,905,203 and 10,487,738
shares held, respectively (135,581) (130,086)
Deferred compensation on restricted stock
incentive plan (5,933) (7,295)
--------------------------------------------------------------------------------------------------------
Total shareholders' equity 77,142 76,867
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Total liabilities and shareholders' equity $ 192,323 $ 195,562
========================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF EARNINGS
(unaudited)
<TABLE>
<CAPTION>
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(in thousands, except
per share amounts) Thirteen Weeks Ended Thirty-nine Weeks Ended
----------------------------- -------------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Sales $ 99,864 $ 98,962 $ 284,033 $ 278,175
Cost of goods sold 49,337 49,386 142,055 143,236
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Gross profit 50,527 49,576 141,978 134,939
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Expenses (income)
Selling, general and administrative 43,814 43,746 127,053 125,205
Depreciation and amortization 1,338 1,207 3,939 3,525
Interest expense 614 789 1,994 1,953
Interest income (52) (71) (153) (188)
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Total operating and interest expenses 45,714 45,671 132,833 130,495
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Earnings before taxes 4,813 3,905 9,145 4,444
Income taxes 1,747 1,406 3,314 1,600
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Net earnings and comprehensive income $ 3,066 $ 2,499 $ 5,831 $ 2,844
====================================================================================================================
Earnings per share
Basic $ 0.19 $ 0.14 $ 0.34 $ 0.16
Diluted $ 0.19 $ 0.14 $ 0.34 $ 0.16
====================================================================================================================
Weighted average shares outstanding
Basic 16,448 18,059 16,943 18,109
Diluted 16,470 18,059 16,950 18,109
====================================================================================================================
Dividends per share $ 0.025 $ 0.10 $ 0.075 $ 0.30
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
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(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
------------------------------------------------------------------------------------------------------------------------------------
Thirty-nine weeks ended October 29, 2000
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance January 30, 2000 29,139,726 $291 $39,142 $174,815 (10,487,738) ($130,086) ($7,295) $ 76,867
Net earnings 5,831 5,831
Cash dividend - $.025 per
share on a quarterly basis (1,332) (1,332)
Issuance of restricted stock 21,500 64 (64)
Cancellation of restricted stock (2,700) (18) 18
Amortization and vesting of deferred
compensation on restricted stock
incentive plan (232) 1,408 1,176
Purchase of treasury stock (1,417,465) (5,495) (5,495)
Stock issuances as compensation for
professional services 22,288 1 94 95
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Balance October 29, 2000 29,180,814 $292 $39,050 $179,314 (11,905,203) ($135,581) ($5,933) $ 77,142
==================================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
(in thousands)
Thirty-nine Weeks Ended
-------------------------------
October 29, October 31,
2000 1999
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 5,831 $ 2,844
Adjustments to reconcile net earnings to cash
provided by operating activities
Depreciation and amortization 3,939 3,525
LIFO charge (credit) 300 (600)
Deferred income taxes 2,555 (985)
Amortization of deferred compensation on
restricted stock incentive plan 1,408 1,036
Stock issuance as compensation for professional services 95
(Increase) decrease in assets
Receivables and prepaid expenses 2,399 (103)
Inventory at current cost 1,489 (2,909)
Pension payment in excess of required contribution (3,078)
Other noncurrent assets (1,569) (2,598)
Increase (decrease) in liabilities
Accounts payable 3,251 9,019
Accrued liabilities 3,841 766
Current income tax obligations (1,491) 1,217
Postretirement benefits other than pensions 397 501
Payments against closed store accrual (1,955) (1,930)
Other liabilities 502 (286)
------------------------------------------------------------------------------------------------
Net cash provided by operating activities 17,914 9,497
------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property and equipment (3,224) (6,736)
Other 268
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Net cash used in investing activities (2,956) (6,736)
------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net borrowings (repayments) on revolving
credit agreement (10,000) 8,000
Purchase of treasury stock (5,495) (1,107)
Cash dividends paid (1,332) (5,713)
------------------------------------------------------------------------------------------------
Net cash used in financing activities (16,827) 1,180
------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents (1,869) 3,941
Cash and cash equivalents:
Beginning of period 6,904 6,959
------------------------------------------------------------------------------------------------
End of period $ 5,035 $ 10,900
================================================================================================
Supplemental disclosures:
Cash paid during the period for:
Interest $ 1,700 $ 1,551
Income taxes $ 1,807 $ 2,507
================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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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
30, 2000 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. Per share amounts
are based on average shares outstanding during each quarter and may not add to
the year-to-date amount.
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
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(dollars in thousands, except for Thirteen Weeks Ended Thirty-nine Weeks Ended
per share amounts) ---------------------------- ------------------------------
October 29, October 31, October 29, October 31,
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic earnings per share
Net earnings $ 3,066 $ 2,499 $ 5,831 $ 2,844
===================================================================================================================
Weighted average number of common shares
outstanding during period 16,448,010 18,059,270 16,943,034 18,109,363
===================================================================================================================
Basic earnings per share $ 0.19 $ 0.14 $ 0.34 $ 0.16
===================================================================================================================
Diluted earnings per share
Net earnings $ 3,066 $ 2,499 $ 5,831 $ 2,844
===================================================================================================================
Weighted average number of common shares
outstanding during period 16,448,010 18,059,270 16,943,034 18,109,363
Common stock equivalents 21,686 0 7,462 0
Contingently issuable shares 0 0 0 0
------------------------------------------------------------------------------------------------------------------
16,469,696 18,059,270 16,950,496 18,109,363
===================================================================================================================
Diluted earnings per share $ 0.19 $ 0.14 $ 0.34 $ 0.16
===================================================================================================================
Weighted average common stock equivalents not
included in EPS because the effect would be
anti-dilutive 281,987 466,296 291,408 343,556
===================================================================================================================
</TABLE>
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NOTE 3: RESERVE FOR STORE CLOSINGS
Store closing reserves are established based on estimates of net lease
obligations and other store closing costs. 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 be
closed 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 29, 2000 represents the present
value of future net lease obligations required for the locations which have been
closed.
The 2000 activity in this reserve is as follows:
<TABLE>
<CAPTION>
Imputed Payments on
(in thousands) January 30, 2000 Interest Reserve October 29, 2000
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Lease obligations $6,552 $196 ($2,151) $4,597
</TABLE>
NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance as to the appropriate timing for
recognition of revenue. The company recognizes revenue upon the delivery of the
product to a customer. Management does not believe that SAB 101 will have any
significant impact on its financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. The company is not holding any derivative financial or
commodity instruments at October 29, 2000, and therefore FAS 133 would not have
any significant financial statement impact.
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 2 stores and
closed 3 stores during the thirteen weeks ended October 29, 2000 resulting in a
total of 447 stores at period end.
During the thirty-nine weeks ended October 29, 2000, cash from operating
activities of $17.9 million was used to fund additions to property and equipment
of $3.2 million, $5.5 million of treasury stock repurchases and debt repayments
totaling $10.0 million. At October 29, 2000, the Company had $21 million in
outstanding debt, or about 21% of total capitalization, compared to $37 million
in outstanding debt at the end of last year's third quarter.
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<PAGE> 9
RESULTS OF OPERATIONS
Thirteen weeks ended October 29, 2000 compared to thirteen weeks ended October
31, 1999
Net earnings were $3.1 million, or $.19 per share, compared with $2.5 million,
or $.14 a share in the same period of the prior year. The increase in earnings
resulted from higher comparable store sales, a higher gross margin and expense
controls.
Sales increased to $99.9 million from $99.0 million in last year's third
quarter, as the result of an increase of 1.2% in comparable store sales,
partially offset by a $250 thousand decrease in sales from net store opening and
closing activity. Sales benefited from the store repositioning strategy,
aggressive store remodeling and product mix changes that the Company has
implemented.
Gross margins improved to 50.6% from 50.1% last year due to tighter inventory
control resulting in fewer markdowns, the addition of higher margin products,
and less reliance being placed on price promotions.
In the third quarter of 2000, total selling, general and administrative expenses
as a percentage of sales decreased to 43.9% from 44.2% due to leverage from
positive comparable store sales and more efficient use of advertising
expenditures.
Interest expense was lower due to a reduction in the debt level, partially
offset by an increase in interest rates by the Federal Reserve Bank.
Thirty-nine weeks ended October 29, 2000 compared to thirty-nine weeks ended
October 31, 1999
Net earnings were $5.8 million, or $.34 per share, compared with $2.8 million,
or $.16 a share in the same period of the prior year. The increase in earnings
resulted from higher comparable store sales, a higher gross margin and strong
expense controls.
Sales increased to $284.0 million from $278.2 million as the result of an
increase of 3.1% in comparable store sales, partially offset by a $2.0 million
decrease in sales from net store opening and closing activity. Sales benefited
from the store repositioning strategy, aggressive store remodeling and product
mix changes that the Company has implemented.
Gross margins improved to 50.0% from 48.5% last year, recovering from the
promotional activity in the first half of 1999 that was necessary to offset the
effects of apparel price deflation.
In the first thirty-nine weeks of 2000, total selling, general and
administrative expenses as a percentage of sales decreased to 44.7% from 45.0%
due to leverage from positive comparable store sales and more efficient use of
advertising expenditures.
Interest expense was slightly higher due to an increase in interest rates by the
Federal Reserve Bank, partially offset by a lower debt level.
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.
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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 years,
combined with inventory reductions, has caused LIFO credits. However in the last
two quarters, an increase in the PPI indices resulted in LIFO charges.
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.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 3, 1999, the staff of the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in
Financial Statements. SAB 101 provides guidance as to the appropriate timing for
recognition of revenue. The company recognizes revenue upon the delivery of the
product to a customer. Management does not believe that SAB 101 will have any
significant impact on its financial statements.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("FAS") No. 133, Accounting for Derivative
Instruments and Hedging Activities. FAS 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. The company is not holding any derivative financial or
commodity instruments at October 29, 2000, and therefore FAS 133 would not have
any significant financial statement impact.
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 2: RECENT ISSUANCES OF UNREGISTERED SECURITIES
During the thirty-nine weeks ended October 29, 2000, the Company issued 13,766
shares of Common Stock valued at $54,443 to Creative Network Studios for
advertising and marketing services. The Company also issued 523 shares of Common
Stock valued at $2,059 to Vinalrae H. M. Garmon for marketing services. These
issuances were exempt from registration pursuant to Section 4 (2) of the
Securities Act of 1933, as amended, as they did not involve a public offering of
securities.
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ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not holding any derivative financial or commodity instruments at
October 29, 2000. 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.
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, 2000
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