Hancock Fabrics Reports Results for the First Quarter of Fiscal 2015

BALDWYN, Miss.--()--Hancock Fabrics, Inc. (OTC symbol: HKFI) today announced financial results for its first quarter ended May 2, 2015.

Financial results for the first quarter include:

  • Net sales for the quarter were $61.7 million compared to $63.0 million in the first quarter of the prior year. Comparable store sales declined by 1.9% primarily due to the disruption of product flow resulting from West Coast port issues.
  • Gross profit for the first quarter was 43.6% compared to 45.1% for the first quarter of the prior year.
  • Selling, general and administrative expenses for the first quarter of 2015, including depreciation and amortization, increased to 45.8% of net sales compared to 43.6% for the first quarter of the prior year. Increases in employee benefit costs, professional fees and reduced commission income was partially offset by reductions in insurance claims activity and the gain recognized from sales of an owned store location.
  • Operating loss for the quarter was $(1.3) million compared to operating income of $0.9 million in the first quarter last year.
  • Interest expense for the first quarter of 2015 was $2.8 million and includes $1.4 million of costs, of which approximately $0.9 million represents a non-cash write-off of prior deferred financing costs, resulting from the early termination of the Company’s amended and restated loan and security agreement with General Electric Capital Corporation following its debt refinancing in April 2015. Excluding the one-time expense resulting from this termination, non-GAAP interest expense would have been $1.4 million for the first quarter of 2015 compared to $1.4 million for the same period of 2014.
  • EBITDA, a non-GAAP measure which is defined as earnings (loss) before interest, taxes, depreciation and amortization, was a loss of $(55) thousand for the quarter compared to income of $2.1 million for the same period last year.
  • At quarter end, the Company had outstanding borrowings under its new revolver and term loan credit facility of $59.8 million and $17.5 million, respectively, and outstanding letters of credit of $8.5 million. Availability under the new credit facility was $6.3 million at May 2, 2015, but would have been $7.8 million, excluding $1.5 million of duplicate letters of credit from the transition to the Company’s new lender. The balance of the Company’s subordinated debt was $8.2 million at quarter end.

Steve Morgan, President and Chief Executive Officer, commented, “As with many retailers, it was a challenging quarter due to the dual headwinds of a lag in receipt of spring goods due to the west coast port delays and severe winter weather early on. In addition there was more promotional activity and increased freight costs, which put downward pressure on gross profit. That being said, there was a very large positive in the quarter, in that we completed a debt refinance with Wells Fargo Capital Finance which extended our debt maturity out five years and increased availability. The new financing enhances our ability to achieve our inventory productivity goals which in turn helps in generating positive cash flow from operations. We will maintain our focus on cash management as we work to drive operating results.”

Store Openings, Closings and Remodels

During the first quarter of 2015, the Company opened two new stores, relocated two stores and closed three ending the quarter with 262 stores.

Hancock Fabrics, Inc. is committed to being the inspirational authority in fabric and sewing, serving creative enthusiasts with a complete selection of fashion and home decorating textiles, sewing accessories, needlecraft supplies and sewing machines. The Company currently operates 262 retail stores in 37 states and an Internet store at www.hancockfabrics.com.

Forward-looking Statements

Statements in this news release that are not historical facts are forward-looking statements. Such forward looking statements include the statements on our ability to achieve our inventory productivity goals and generate positive cash flow from operation and our intention to focus on cash management. Forward-looking statements involve risks and uncertainties which could cause actual results to differ materially from those contained in the forward looking statements. These risks and uncertainties include, but are not limited to the following: adverse economic conditions; intense competition and adverse discounting actions taken by competitors; our merchandising initiatives and marketing emphasis may not provide expected results; changes in customer demands and failure to manage inventory effectively; our inability to effectively implement our growth strategy; our ability to attract and retain skilled people; interest rate increases; our ability to successfully access funds through capital markets and financial institutions; significant changes in discount rates, mortality rates, actual investment return on pension assets and other factors could affect our earnings, equity, and pension contributions in future periods; business matters encountered by our suppliers may adversely impact our ability to meet our customers’ needs; risks associated with obtaining merchandise from foreign suppliers; transportation industry challenges and rising fuel costs; delays or interruptions in the flow of merchandise between our suppliers and/or our distribution center and our stores; changes in the labor market and in federal, state, or local regulations; taxing authorities could disagree with our tax treatment of certain deductions or transactions, resulting in unexpected tax assessments; our current cash resources might not be sufficient to meet our expected near-term cash needs; a disruption in our data processing services; a failure to adequately maintain the security of confidential information; failure to comply with various laws and regulations as well as litigation developments; we may not be able to maintain or negotiate favorable lease terms for our retail stores; changes in accounting principles; serious disruptions or catastrophic events, including geo-political events and weather; changes in newspaper subscription rates may result in reduced exposure to our circular advertisement; unexpected or unfavorable consumer responses to our promotional or merchandising programs; risks associated with our common stock trading on the OTC Markets, formerly known as the “Pink Sheets”; our stock price has been volatile and could decrease in value; future sales of our common stock could adversely affect the market price and our future capital-raising activities could involve the issuance of equity securities, which could result in a decline in the trading price of shares of our common stock; we do not expect to pay cash dividends on shares of our common stock for the foreseeable future; satisfaction of the closing conditions and completion of the sale leaseback arrangement; and other risks and uncertainties discussed in the Company’s Securities and Exchange Commission (“SEC”) filings, including the risk factors set forth in Item 1A of the Company's Annual Report on Form 10-K for the year ended January 31, 2015 and the Company’s other reports with the SEC. The Company undertakes no obligation to revise these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events.

May 2, April 26,
(in thousands, except for share amounts)       2015     2014
Current assets:
Cash and cash equivalents $ 2,184 $ 1,918
Receivables, less allowance for doubtful accounts 3,610 4,031
Inventories, net 106,065 106,837
Prepaid expenses         1,780         3,137  
Total current assets 113,639 115,923
Property and equipment, net 32,931 33,176
Goodwill 2,880 2,880
Other assets         2,962         2,228  
Total assets       $ 152,412       $ 154,207  
Liabilities and Shareholders' (Deficit) Equity
Current liabilities:
Accounts payable $ 20,946 $ 18,572
Accrued liabilities         13,400         12,514  
Total current liabilities 34,346 31,086
Long-term debt obligations, net 85,509 82,003
Capital lease obligations 2,345 2,557
Postretirement benefits other than pensions 3,099 2,771
Pension and SERP liabilities 42,950 27,352
Other liabilities         5,693         5,496  
Total liabilities 173,942 151,265
Commitments and contingencies              
Shareholders' (deficit) equity:

Common stock, $.01 par value; 80,000,000 shares authorized; 35,403,700 and 35,118,436 issued and 21,900,160 and 21,642,853 outstanding, respectively

354 351
Additional paid-in capital 91,958 91,533
Retained earnings 87,161 94,033

Treasury stock, at cost, 13,503,540 and 13,475,583 shares held, respectively

(153,813 ) (153,794 )
Accumulated other comprehensive loss         (47,190 )       (29,181 )
Total shareholders' (deficit) equity         (21,530 )       2,942  
Total liabilities and shareholders' (deficit) equity       $ 152,412       $ 154,207  
Thirteen Weeks Ended
(in thousands, except per share amounts) May 2,


    % of

net sales

    April 26,


    % of

net sales

Net sales $ 61,668 100.0


$ 62,994 100.0


Cost of goods sold   34,753       56.4         34,559       54.9  
Gross profit 26,915 43.6 28,435 45.1
Selling, general and administrative expense 27,183 44.1 26,560 42.1
Depreciation and amortization   1,068       1.7         960       1.5  
Operating (loss) income (1,336 ) (2.2 ) 915 1.5
Interest expense   2,834       4.6         1,366       2.2  
Loss before income taxes (4,170 ) (6.8 ) (451 ) (0.7 )
Income taxes   -       -         -       -  
Net loss $ (4,170 )     (6.8 )%     $ (451 )     (0.7 )%
Basic and diluted loss per share:                    
Net loss $ (0.20 )           $ (0.02 )      
Weighted average shares outstanding:
Basic and diluted   21,314               20,881        

Supplemental Disclosures Regarding Non-GAAP Financial Information

The Company has presented Earnings (Loss) before Interest, Taxes, Depreciation and Amortization (“EBITDA”) in this press release to provide investors with additional information to evaluate our operating performance and our ability to service our debt. The Company defines EBITDA as earnings (loss) before interest, income taxes, depreciation and amortization. The Company uses EBITDA, among other things, to evaluate operating performance, to plan and forecast future periods’ operating performance, and as an incentive compensation target for certain management personnel.

As EBITDA is not a measure of operating performance or liquidity calculated in accordance with U.S. GAAP, this measure should not be considered in isolation of, or as a substitute for, net income (loss), as an indicator of operating performance, or net cash provided by (used in) operating activities as an indicator of liquidity. Our computation of EBITDA may differ from similarly titled measures used by other companies. As EBITDA excludes certain financial information compared with net income (loss) and net cash provided by (used in) operating activities, the most directly comparable GAAP financial measures, users of this financial information should consider the types of events and transactions which are excluded. The table below shows a reconciliation of EBITDA to net loss and net cash used in operating activities.

Hancock Fabrics, Inc.
Reconciliation of EBITDA
Thirteen Weeks Ended
May 2, April 26,
(in thousands) 2015     2014
Net cash used in operating activities $ (1,230 ) $ (2,193 )
Depreciation and amortization, including cost of goods sold (1,281 ) (1,171 )
Amortization of deferred loan costs (1,031 ) (178 )
Stock compensation expense (65 ) (173 )
Inventory valuation reserve 13 179
Other 151 (13 )
Changes in assets and liabilities   (727 )       3,098  
Net loss (4,170 ) (451 )
Interest expense 2,834 1,366
Depreciation and amortization, including cost of goods sold   1,281         1,171  
EBITDA $ (55 )     $ 2,086  


Hancock Fabrics, Inc.
James B. Brown, 662-365-6112
Executive Vice President and Chief Financial Officer


Hancock Fabrics, Inc.
James B. Brown, 662-365-6112
Executive Vice President and Chief Financial Officer