Hancock Fabrics, Inc. (OTC symbol: HKFI) today announced
financial results for its second quarter ended July 26, 2014 and
first half of fiscal 2014.
Financial results for the second quarter include:
- Net sales for the quarter were $59.3
million compared to $59.1 million for second quarter of last year,
and comparable store sales increased 0.9% following a 1.7% decrease
for the same period of the prior year, which represents a 260 basis
point improvement.
- Gross profit for the second quarter
declined by 30 basis points to 44.6% as compared to 44.9% for the
second quarter of the prior year.
- Selling, general and administrative
expenses for the quarter, including depreciation and amortization,
increased by $560,000 or 80 basis points as a percentage of sales
from the same period of the prior year and primarily related to an
increase in health benefit related costs and professional
fees.
- Operating loss for the quarter was $1.9
million compared to a loss of $1.3 million in the second quarter
last year and primarily driven by health benefit related costs and
professional fees
- EBITDA, a non-GAAP measure, which is
defined as earnings (loss) before interest, taxes, depreciation and
amortization was a loss of $685,000 for the quarter compared to a
loss of $63,000 for the same period last year.
- Net loss was $3.3 million, or $0.16 per
basic share, in the second quarter of fiscal 2014 compared to a net
loss of $2.6 million, or $0.13 per basic share in the second
quarter of fiscal 2013.
- At quarter end, the Company had
outstanding borrowings under its revolving line of credit of $67.0
million, a term loan balance of $15.0 million and outstanding
letters of credit of $6.4 million. Additional amounts available to
borrow under its revolving line of credit at the end of the quarter
were $10.5 million. The balance of the Company’s subordinated debt
was $8.2 million at quarter end.
First half financial results include:
- Net sales for the first half of fiscal
2014 were $122.3 million compared to $122.9 million in the first
half of last year, and comparable store sales declined by 0.1.
Excluding the estimated weather impact from the first quarter of
2014, comparable store sales for the first half of 2014 would be a
positive 1.40%.
- Gross profit for the first half of
fiscal 2014 declined by 30 basis points to 44.9% as compared to
45.2% for the prior year. Excluding the fluctuations in the freight
capitalization from both years, the gross profit remained flat
after a 340 basis point improvement in the prior year.
- Selling, general and administrative
expenses for the first half of fiscal 2014 including depreciation
and amortization, increased by $392,000 or 50 basis points to 45.7%
of sales from 45.2% of sales in the same period of the prior year.
This was primarily driven by increased depreciation from
investments in stores and the new website as well as increased
professional fees.
- Operating loss for the first half of
fiscal 2014 was $1.0 million compared to operating income of
$32,000 for the first half of the previous year.
- EBITDA for the first half of fiscal
2014 was $1.4 million compared to $2.4 million for the first half
of last year.
- Net loss was $3.8 million, or $0.18 per
basic share, in the first half of fiscal 2014, compared to a net
loss of $3.1 million, or $0.15 per basic share in the first half of
fiscal 2013.
Steve Morgan, President and Chief Executive Officer commented,
“We were able to achieve positive comp sales in the second quarter,
typically our lowest sales period and maintain most of the 340
basis point gross profit improvement from the first half of the
prior year. Expenses were a challenge in the second quarter as we
incurred an unusual amount of health benefit related costs and
expenses related to the going private transaction, which was
subsequently withdrawn. However, in the event we pursue going
private in the future, we will be able to leverage a good portion
of the expenses already incurred. Depreciation also increased from
our investments in the newly redesigned web site and the relocation
of stores into our new format; however these investments are
increasingly driving comp sales and operating income. As with most
retailers, our first half sales and margin results were negatively
impacted by the unusually bad weather early in the year but that is
now behind us and we see good opportunity going forward. ”
Morgan continued, “As we move into the back half of the year we
will continue to focus on maintaining the large margin gains from
the prior year. We will accelerate our focus on expense management
to recoup the significant one-time expenses from the second quarter
and look to keep decreasing expenses going forward. ”
Store Openings, Closings and
Remodels
During the second quarter, the Company opened one new location
and closed one store where we chose not to stay in the market. In
the first half of fiscal 2014, one store was opened, three units
closed and two units relocated ending the quarter with 260
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 260 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 that 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: our
business and operating results may be adversely affected by the
general economic conditions and the ongoing slow economic recovery;
intense competition and adverse discounting actions taken by
competitors, which could have a material effect on our operations;
our merchandising initiatives and marketing emphasis may not
provide expected results; changes in customer demands and failure
to manage inventory effectively could adversely affect our
operating results; our inability to effectively implement our
growth strategy and access funds for future growth may have an
adverse effect on sales growth; our ability to attract and retain
skilled people is important to our success; we have significant
indebtedness and interest rate increases could negatively impact
profitability; our business is dependent on the ability to
successfully access funds through capital markets and financial
institutions and any inability to access funds may limit our
ability to execute our business plan and restrict operations we
rely on for future growth; significant changes in discount rates,
mortality rates, actual investment return on pension assets,
changes in consumer demand or purchase patterns 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;
tightening of purchase terms by suppliers and their factories may
have a negative impact on our business; we are vulnerable to risks
associated with obtaining merchandise from foreign suppliers;
transportation industry challenges and rising fuel costs may
negatively impact our operating results; delays or interruptions in
the flow of merchandise between our suppliers and/or our
distribution center and our stores could adversely impact our
operating results; changes in the labor market and in federal,
state, or local regulations could have a negative impact on our
business; 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
information systems would negatively impact our business; a failure
to adequately maintain the security of confidential information
could have an adverse effect on our business; failure to comply
with various laws and regulations as well as litigation
developments could adversely affect our business operations and
financial performance; we may not be able to maintain or negotiate
favorable lease terms for our retail stores; changes in accounting
principles may have a negative impact on our reported results; our
results may be adversely affected by 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; the proposed going private
transaction may not necessarily result in the anticipated cost
savings and benefits; unexpected or unfavorable consumer responses
to our promotional or merchandising programs could materially
adversely affect our sales, results of operations, cash flow and
financial condition; new regulations related to “conflict minerals”
may force us to incur additional expenses, may make our supply
chain more complex and may result in damage to our reputation with
customers; there are 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
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 25, 2014 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.
HANCOCK FABRICS, INC.
CONSOLIDATED BALANCE SHEETS (unaudited)
July 26, July 27,
(in thousands, except for share amounts)
2014
2013 Assets Current assets: Cash and
cash equivalents $ 2,373 $ 2,163 Receivables, less allowance for
doubtful accounts 3,770 3,693 Inventories, net 113,883 108,174
Prepaid expenses 2,767
2,902 Total current assets 122,793 116,932
Property and equipment, net 33,283 33,099 Goodwill 2,880 2,880
Other assets 1,964
2,500 Total assets $ 160,920
$ 155,411
Liabilities and Shareholders'
Equity (Deficit) Current liabilities: Accounts payable $ 20,689
$ 23,358 Accrued liabilities 13,017
13,488 Total current liabilities 33,706
36,846 Long-term debt obligations, net 90,226 75,041 Capital
lease obligations 2,506 2,697 Postretirement benefits other than
pensions 2,817 2,375 Pension and SERP liabilities 26,296 33,031
Other liabilities 5,440
5,484 Total liabilities 160,991
155,474 Commitments and
contingencies Shareholders' equity (deficit):
Common stock, $.01 par value; 80,000,000
shares authorized; 35,034,848 and 34,926,325 issued and 21,556,541
and 21,488,940 outstanding, respectively
350 350 Additional paid-in capital 91,706 90,996 Retained earnings
90,712 93,333
Treasury stock, at cost, 13,478,307 and
13,437,385 shares held, respectively
(153,796 ) (153,755 ) Accumulated other comprehensive loss
(29,043 ) (30,987 ) Total
shareholders' equity (deficit) (71 )
(63 ) Total liabilities and shareholders' equity
(deficit) $ 160,920 $ 155,411
HANCOCK FABRICS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share
amounts) (unaudited)
Thirteen Weeks Ended July
26,2014 % of
net sales
July 27,2013 % of
net sales
Net sales $ 59,317 100.0 % $ 59,134 100.0 % Cost of
goods sold 32,838 55.4
32,593 55.1 Gross
profit 26,479 44.6 26,541 44.9 Selling, general and
administrative expenses 27,369 46.1 26,911 45.5 Depreciation and
amortization 989 1.7
887 1.5 Operating
loss (1,879 ) (3.2 ) (1,257 ) (2.1 ) Interest expense, net
1,442 2.4
1,369 2.3 Loss before income
taxes (3,321 ) (5.6 ) (2,626 ) (4.4 ) Income taxes -
- -
- Net loss $ (3,321 ) (5.6 )%
$ (2,626 ) (4.4 )% Basic and
diluted loss per share:
Net loss $ (0.16 )
$ (0.13 ) Weighted
average shares outstanding: Basic and diluted 20,913
20,466
Twenty-six Weeks Ended
July 26,2014 % of
net sales
July 27,2013 % of
net sales
Net sales $ 122,311 100.0 % $ 122,875 100.0 % Cost of
goods sold 67,397 55.1
67,357 54.8 Gross
profit 54,914 44.9 55,518 45.2 Selling, general and
administrative expenses 53,929 44.1 53,710 43.7 Depreciation and
amortization 1,949 1.6
1,776 1.5
Operating income (loss) (964 ) (0.8 ) 32 0.0 Interest
expense, net 2,808 2.3
3,125 2.5 Loss
before income taxes (3,772 ) (3.1 ) (3,093 ) (2.5 ) Income taxes
- - -
- Net loss $ (3,772 )
(3.1 )% $ (3,093 ) (2.5
)% Basic and diluted loss per share:
Net loss $ (0.18 )
$ (0.15 )
Weighted average shares outstanding: Basic and diluted
20,897
20,453
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 (used
in) provided by 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 (used in)
provided by 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
(unaudited)
Thirteen Weeks Ended Twenty-six Weeks
Ended July 26, July 27, July 26, July
27, (in thousands)
2014 2013
2014 2013
Net cash used in operating activities $ (6,335 ) $ (4,798 ) $
(8,528 ) $ (5,308 ) Depreciation and amortization, including cost
of goods sold (1,194 ) (1,194 ) (2,365 ) (2,389 ) Amortization of
deferred loan costs (178 ) (177 ) (356 ) (361 ) Amortization of
bond discount - - - (379 ) Stock-based compensation (172 ) (117 )
(345 ) (276 ) Inventory valuation reserve (303 ) (311 ) (124 ) (576
) Other (90 ) (95 ) (103 ) (114 ) Changes in assets and liabilities
4,951 4,066 8,049
6,310 Net loss (3,321 )
(2,626 ) (3,772 ) (3,093 ) Interest expense, net 1,442 1,369 2,808
3,125 Depreciation and amortization, including cost of goods sold
1,194 1,194 2,365
2,389 EBITDA $ (685 )
$ (63 ) $ 1,401 $ 2,421
Hancock Fabrics, Inc.James B. Brown, 662-365-6112Executive Vice
President andChief Financial Officer