HKF Hancock Fabrics

Hancock Fabrics, Inc. (NYSE:HKF), today announced the unaudited results of its third fiscal quarter of 2005. Sales in the 13 weeks ended October 29, 2005 decreased 5.5% to $103.9 million from $109.9 million in the same quarter of 2004. The Company reported a net loss of $2.5 million, or $.14 per diluted share, compared with net earnings of $1.0 million, or $.05 per diluted share, in the third quarter a year ago. In addition, the Company announced that its Board of Directors has suspended indefinitely its quarterly dividend. In commenting on the results, Jane Aggers, Chief Executive Officer, stated, "The selling environment is still very challenging, as evidenced by our 6.3% decline in comparable store sales during the third quarter. Our home decorating business and the fleece fabrics category provided the most negative results. Although promotional activities increased in the market, our gross margin rate remained flat, before the effect of LIFO," Aggers said. "Throughout the third quarter, we implemented three major initiatives involving merchandising, marketing and store presentation. Although results have been mixed, we believe we have taken the necessary steps to improve our connection with our customers. We will continue to monitor the results of these initiatives for the remainder of the fall selling season and determine which strategies are appropriate for the future," Aggers continued. "For the balance of the year, we will focus on debt reduction. At the end of the third quarter, our debt was at $62 million under our $110 million credit facility. From an operational standpoint, we will reduce operating costs and manage our year-end inventory levels. We have begun the expense reduction process and will continue to refine and right-size our operating expense structure." "We expect to complete sale/leasebacks of two more store properties in November and have a letter of intent to sell our former distribution center and corporate offices in Tupelo, MS. Assuming no delays in the scheduled process, we believe that the sale of the Tupelo property will be finalized prior to fiscal year end and, when combined with the store sale/leasebacks, will yield approximately $7 million. One more store property remains, to sell and leaseback, which could raise another $2 million in early 2006. In addition, the suspension of the dividend will add approximately $4.5 million to Hancock's annualized cash flow." "In looking forward to 2006, we will focus our efforts primarily on improving productivity in all areas of the Company. As one result, we will not be opening new stores, except in relocation circumstances," Aggers concluded. The Company also noted that the determination of insurance deductible levels related to Hurricanes Katrina and Rita is ongoing between Hancock and its insurer. Based on available facts, a loss of approximately $230,000 has been recorded in the third quarter for the expected insurance deductible. Hancock Fabrics, Inc. is a specialty retailer of fabric and related home sewing and decorating accessories. The Company operates 446 retail fabric stores in 43 states and operates an internet store under the domain name, www.hancockfabrics.com. Comments in this news release that are not historical facts are forward-looking statements that involve risks and uncertainties which could cause actual results to differ materially from projections. These risks and uncertainties include, but are not limited to, 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, costs and delays in acquiring or developing new store sites, and other contingencies discussed in the Company's Securities and Exchange Commission filings. Hancock undertakes no obligation to release revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required to be reported under the rules and regulations of the Securities and Exchange Commission. -0- *T COMPARATIVE FINANCIAL SUMMARY (unaudited) (000's omitted, except for per share amounts) 13 Weeks 13 Weeks 39 Weeks 39 Weeks October 29, October 31, October 29, October 31, 2005 2004 2005 2004 ----------- ----------- ----------- ----------- Sales $ 103,869 $ 109,914 $ 284,953 $ 304,770 Cost of Goods Sold After LIFO Effect 54,532 57,290 148,344 156,197 ----------- ----------- ----------- ----------- Gross Profit 49,337 52,624 136,609 148,573 Expenses: Selling, G&A 50,085 48,846 145,531 143,931 Dep'n/Amort 2,209 1,923 6,634 5,435 ----------- ----------- ----------- ----------- 52,294 50,769 152,165 149,366 ----------- ----------- ----------- ----------- Operating Income (Loss) (2,957) 1,855 (15,556) (793) Interest Expense, net 975 321 2,007 601 ----------- ----------- ----------- ----------- Earnings (Loss) Before Income Taxes (3,932) 1,534 (17,563) (1,394) Income Taxes (1,427) 557 (6,375) (505) ----------- ----------- ----------- ----------- Net Earnings (Loss) $ (2,505) $ 977 $ (11,188) $ (889) =========== =========== =========== =========== Earnings (Loss) Per Share(a) Basic $ (0.14) $ 0.05 $ (0.61) $ (0.05) =========== =========== =========== =========== Diluted $ (0.14) $ 0.05 $ (0.61) $ (0.05) =========== =========== =========== =========== Average Shares Outstanding (000's) Basic 18,516 18,246 18,429 18,149 Diluted 18,516 18,624 18,429 18,149 LIFO Charge (Credit) Included in Cost of Goods Sold $ 1,100 $ 750 $ 3,700 $ 550 (a) Per share amounts are based on the average shares outstanding during each quarter and may not add to the year-to-date amount. CONSOLIDATED BALANCE SHEET (in thousands) October 29, October 31, 2005 2004 ------------- ------------- ASSETS: Current assets: Cash and cash equivalents $ 3,996 $ 4,616 Inventories 178,549 163,874 Income taxes refundable 6,239 2,339 Other current assets 4,051 4,230 ------------- ------------- Total current assets 192,835 175,059 Property and equipment, at depreciated cost 68,307 70,998 Pension payment in excess of required contribution 12,798 14,261 Other assets 12,489 11,940 ------------- ------------- $ 286,429 $ 272,258 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable $ 49,856 $ 45,416 Accrued liabilities 19,876 19,124 Income taxes 4,666 4,579 ------------- ------------- Total current liabilities 74,398 69,119 Long-term debt obligations 61,977 44,000 Lease financing obligation 1,733 0 Postretirement benefits other than pensions 22,934 22,655 Other noncurrent liabilities 10,415 9,152 Shareholders' equity 114,972 127,332 ------------- ------------- $ 286,429 $ 272,258 ============= ============= *T