UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 2, 2015

 

OR

 

[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 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 or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification No.)
One Fashion Way, Baldwyn, MS	38824
(Address of principal executive offices)	(Zip Code)

 

(662) 365-6000

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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).          Yes [X]     No [ ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer (Do not check if a smaller reporting company) [ ] Smaller reporting company [ X ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes [  ]     No [X]

 

As of June 9, 2015, there were 22,899,858, shares of Hancock Fabrics, Inc. $.01 par value common stock outstanding.

 

 

Table of Contents

Hancock Fabrics, Inc.,

INDEX TO FORM 10-Q

 

 

Part I. Financial Information		Page
	Item 1. Condensed Financial Statements (unaudited)
	Consolidated Balance Sheets as of May 2, 2015, April 26, 2014, and January 31, 2015	3
	Consolidated Statements of Operations and Comprehensive Loss for the Thirteen Weeks Ended May 2, 2015 and April 26, 2014	4
	Consolidated Statement of Shareholders’ Deficit for the Thirteen Weeks Ended May 2, 2015	5
	Consolidated Statements of Cash Flows for the Thirteen Weeks Ended May 2, 2015 and April 26, 2014	6
	Notes to Consolidated Financial Statements	7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
	Item 3. Quantitative and Qualitative Disclosures about Market Risks	20
	Item 4. Controls and Procedures	20
Part II. Other Information
	Item 1. Legal Proceedings	21
	Item 1A. Risk Factors	21
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	21
	Item 3. Defaults Upon Senior Securities	21
	Item 4. Mine Safety Disclosures	21
	Item 5. Other Information	21
	Item 6. Exhibits	22
Signatures		23

 

 

 

 

PART I. FINANCIAL INFORMATION

 

ITEM 1. CONDENSED FINANCIAL STATEMENTS

 

HANCOCK FABRICS, INC.

CONSOLIDATED BALANCE SHEETS

 

 

See accompanying notes to consolidated financial statements.

 

^{(1) From audited balance sheet included in our annual report on Form 10-K for the fiscal year ended January 31, 2015.}

 

 

HANCOCK FABRICS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(unaudited)

---

 

 

See accompanying notes to consolidated financial statements.

 

 

HANCOCK FABRICS, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' DEFICIT

(unaudited)

---

 

 

 

See accompanying notes to consolidated financial statements.

 

 

HANCOCK FABRICS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

---

 

See accompanying notes to consolidated financial statements.

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

 

 

 

 

 

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the consolidated financial statements as of and for the thirteen weeks ended May 2, 2015, including the notes to those statements, appearing elsewhere in this report. We also suggest that management’s discussion and analysis appearing in this report be read in conjunction with the management’s discussion and analysis and consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015 filed with the Securities and Exchange Commission (“SEC”) on May 1, 2015. Our fiscal year ends on the last Saturday in January and refers to the calendar year ended immediately prior to such date, which contained the substantial majority of the fiscal period (e.g., “fiscal 2014” or “2014” refers to the fiscal year ended January 31, 2015). Fiscal years consist of 52 weeks, comprised of four 13-week fiscal quarters, unless noted otherwise. References herein to first quarter 2015 and first quarter 2014 are for the 13 week periods ended May 2, 2015 and April 26, 2014, respectively. References herein to “Hancock,” the “Company,” “Registrant,” “we,” “our” or “us” refer to Hancock Fabrics, Inc. and its subsidiaries unless the context specifically indicates otherwise.

 

 

Forward Looking Statements

 

 

This Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). Such statements are not historical facts and reflect our current views regarding matters such as operations and financial performance. In general, forward-looking statements are identified by such words or phrases as “anticipates,” “believes,” “approximates,” “estimates,” “expects,” “intends” or “plans” or the negative of those words or other terminology. Forward-looking statements involve inherent risks and uncertainties; our actual results could differ materially from those expressed in our forward-looking statements.

 

The risks and uncertainties, either alone or in combination, that could cause our actual results to differ from those expressed in our forward-looking statements include, but are not limited to, those that are discussed in our Annual Report on Form 10-K filed with the SEC on May 1, 2015 under Item 1A. Risk Factors. Forward-looking statements speak only as of the date made, and neither Hancock nor its management undertakes any obligation to update or revise any forward-looking statement.

 

Our Business

 

Hancock Fabrics, Inc. is a specialty retailer committed to nurturing creativity through a complete selection of fashion and home decorating textiles, sewing accessories, needlecraft supplies and sewing machines. We are one of the largest fabric retailers in the United States, operating as of May 2, 2015, 262 stores in 37 states and an internet store under the domain name hancockfabrics.com. Our stores present a broad selection of fabrics and notions used in apparel sewing, home decorating and quilting projects. None of the information on the website referenced above is incorporated by reference into our reports filed with, or furnished to, the SEC.

 

 

Overview

 

Financial Summary:

 

●

Net sales for the first quarter of fiscal 2015 were $61.7 million compared to $63.0 million for first quarter of fiscal 2014, and comparable store sales declined 1.9% in the first quarter of 2015 after declining 1.1% in the first quarter of fiscal 2014. Sales were hindered in the first quarter of 2015 by the disruption of product flowing into our distribution center and stores due to West Coast port issues and severe winter weather hindered sales in the first quarter of both years.

 

●

Our online sales for the first quarter of fiscal 2015, which are included in the comparable sales number above, increased by 32.9% to $1.2 million. The significant improvement in online sales was attributable to the launch of a new website and expansion of the product assortment offered to online customers.

 

●

Gross margin for the first quarter of fiscal 2015 was 43.6% compared to 45.1% for the first quarter of fiscal 2014.

 

●

Operating loss was $1.3 million in the first quarter of fiscal 2015 compared to operating income of $0.9 million in the first quarter of fiscal 2014.

 

●

Interest expense for the first quarter of 2015 was $2.8 million and includes $1.4 million of costs resulting from the early termination of the amended and restated loan and security agreement. Excluding the non-recurring item, 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.

 

 

●

Net loss was $4.2 million, or $0.20 per basic and diluted share, in the first quarter of fiscal 2015 compared to a net loss of $451,000, or $0.02 per basic and diluted share in the first quarter of fiscal 2014.

 

●

The amount of cash used in operating activities was $1.2 million during the first thirteen weeks of fiscal 2015 compared to $2.2 million of cash used in operating activities for the first thirteen weeks of fiscal 2014.

 

We use a number of key performance measures to evaluate our financial performance, including the following:

 

		Thirteen Weeks Ended
		May 2,				April 26,
		2015				2014
Net sales (in thousands)		$	61,668			$	62,994
Gross margin percentage			43.6	%			45.1	%
Number of stores
Open at end of period(1)			262				260
Comparable stores at period end (2)			253				258
Sales growth
All retail outlets			(2.1	)%			(1.2	)%
Comparable sales (3)			(1.9	)%			(1.1	)%
Total store square footage at period end (in thousands)			3,554				3,431
Net sales per total square footage		$	17.35			$	18.36

 

 

(1)	Open store count does not include the internet store.
(2)	A new store is included in the comparable sales computation immediately upon reaching its one-year anniversary. In instances where stores are either expanded, down-sized or relocated within an existing market the store is not treated as a new store and, therefore, remains in the computation of comparable sales.
(3)	Comparable sales growth computation also includes net sales derived from e-commerce.

 

 

Results of Operations

 

The following table sets forth, for the periods indicated selected statement of operations data expressed as a percentage of sales. This table should be read in conjunction with the following discussion and with our Consolidated Financial Statements, including the related notes.

 

		Thirteen Weeks Ended
(as percent of sales)		May 2,				April 26,
		2015				2014
Net sales			100.0	%			100.0	%
Cost of goods sold			56.4				54.9
Gross profit			43.6				45.1
Selling, general and administrative expenses			44.1				42.1
Depreciation and amortization			1.7				1.5
Operating (loss) income			(2.2	)			1.5
Interest expense, net			4.6				2.2
Loss before income taxes			(6.8	)			(0.7	)
Income taxes			-				-
Net loss			(6.8	)%			(0.7	)%

 

 

Sales

 

		Thirteen Weeks Ended
(change as % of prior year)		May 2,				April 26,
		2015				2014
Retail comparable store base			(2.4	)%			(1.1	)%
E-Commerce			32.9	%			2.5	%
Comparable sales			(1.9	)%			(1.1	)%

 

 

The retail comparable store base percentage presented in the table above was computed based on sales for all stores that have reached their 53^rd week of operation. The first quarter 2015 retail comparable store base sales decrease of 2.4% was the result of a 0.3% decline in average ticket and a 2.1% decrease in transaction count.

 

Sales provided by our e-commerce channel increased 32.9% in the first quarter of fiscal 2015. The sales improvement over the same period in the prior year can be primarily attributed to the launch of the new website which occurred during the first quarter of 2014 and an increase in the product assortment offered to online customers.

 

Nine new stores opened and seven stores, where we chose not to stay in the market, have closed since the first quarter of 2014, the sales from these locations are included in net sales. During the current quarter, the Company opened two new stores, relocated two units and closed three, ending the quarter with 262 stores.

 

 

Our merchandise mix has had minimal change year over year, as reflected in the table below. 

 

		Thirteen Weeks Ended
		May 2,				April 26,
		2015				2014
Apparel and Craft Fabrics			43	%			43	%
Home Decorating Fabrics			11	%			11	%
Sewing Accessories			33	%			33	%
Non-Sewing Accessories			13	%			13	%
			100	%			100	%

 

 

Gross Margin

 

Costs of goods sold include:

 

●

the cost of merchandise

 

●

inventory rebates and allowances including term discounts

 

●

inventory shrinkage and valuation adjustments

 

●

freight charges

 

●

costs associated with our sourcing operations, including payroll and related benefits

 

●

costs associated with receiving, processing, and warehousing merchandise

 

The classification of these expenses varies across the retail industry.

 

Specific components of cost of goods sold for the first quarter of fiscal 2015 and 2014 are as follows:

 

		Thirteen Weeks Ended
		May 2,				% of				April 26,				% of
(dollars in thousands)		2015				Sales				2014				Sales
Net sales		$	61,668				100.0	%		$	62,994				100.0	%
Merchandise cost			29,344				47.6	%			29,384				46.7	%
Freight			2,265				3.7	%			2,134				3.4	%
Sourcing and warehousing			3,144				5.1	%			3,041				4.8	%
Gross profit		$	26,915				43.6	%		$	28,435				45.1	%

 

 

The direct cost of merchandise increased as a percentage of sales by 90 basis points for the first quarter of 2015 as compared to the same period of 2014. This change resulted primarily from promotional activity and inventory valuation charges partially offset by reductions in shrinkage.

 

Freight expense increased by 30 basis points in the first quarter 2015 compared to the first quarter 2014. The increase was driven by additional domestic freight as we tried to cover merchandise shortages caused by the West Coast shipping disruption.

 

 

Sourcing and warehousing costs for the Company vary based on both the volume of inventory received during any period and the rate at which inventory is shipped out, or inventory turns. The cost difference for the first quarter of 2015 compared to the same period in 2014 is primarily due to increased sourcing and warehousing costs partially offset by a reduction in inventory turns during those periods, which influences the amount of sourcing and warehousing costs capitalized in inventory.

 

In total, gross margin decreased by 150 basis points in the first quarter 2015 from first quarter 2014 levels.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses include:

 

●

payroll and related benefits (for our store operations, field management, and corporate functions)

 

●

advertising

 

●

general and administrative expenses

 

●

occupancy including rent, common area maintenance, taxes and insurance for our retail locations

 

●

operating costs of our headquarter facilities

 

●

other expense (income)

 

Specific components of selling, general and administrative expenses (SG&A) include:

 

		Thirteen Weeks Ended
		May 2,				% of				April 26,				% of
(dollars in thousands)		2015				Sales				2014				Sales
Retail store labor costs		$	9,967				16.2	%		$	9,495				15.1	%
Advertising			2,197				3.6	%			2,210				3.5	%
Store occupancy			7,731				12.5	%			7,622				12.1	%
Retail SG&A			4,434				7.2	%			4,416				7.0	%
Corp SG&A			2,854				4.6	%			2,817				4.4	%
Total SG&A		$	27,183				44.1	%		$	26,560				42.1	%

 

Retail Store Labor Costs – The retail store labor costs increased during the first thirteen weeks of 2015 as compared to the same period in 2014. The increase was primarily due to a higher benefit costs for medical insurance and pension expense as compared to 2014.

 

Advertising – Advertising expense was basically unchanged for the first quarter of 2015 compared to the same period in 2014 and in-line with expectations.

 

Store Occupancy – The change in the Company’s store occupancy expense can be attributed to increased direct occupancy costs partially offset by reductions in repairs and maintenance cost.

 

Retail SG&A – Retail selling, general and administrative expenses did not change significantly in the first quarter of 2015 as compared to 2014. Increased costs for telephone services and reduced net commission income from a third party loyalty program were primarily offset by reductions in claim based insurance costs.

 

 

Corporate SG&A – These are costs related primarily to staffing and operation of the Company’s headquarters. The small increase for the first quarter of 2015 as compared to the first quarter of 2014 resulted from higher professional fees, which were partially offset by the gain recognized from sale of an owned store location and reduced stock compensation expense.

 

Interest Expense

 

		Thirteen Weeks Ended
(dollars in thousands)		May 2,				% of				April 26,				% of
		2015				Sales				2014				Sales
Interest expense		$	2,834				4.6	%		$	1,366				2.2	%

 

 

The Company’s interest costs are driven by borrowings on our credit facilities and a small number of capital leases. We currently have an asset-based facility and subordinated-debt outstanding. Interest expense for the first quarter 2015 includes $1.4 million of costs resulting from the early termination of the amended and restated loan and security agreement with General Electric Capital Corporation on April 22, 2015 (see Note 4 to the Consolidated Financial Statements included in this report). Excluding the non-recurring item, interest expense was $1.4 million or 2.4% of sales for the first quarter of 2015.

 

Income Taxes

 

The Company did not recognize any income tax benefit during the first quarter of fiscal 2015 or 2014 presented in this report, given the uncertainty in realizing the future benefit. As of May 2, 2015, January 31, 2015, and April 26, 2014, the Company has established a 100% valuation allowance to offset the net deferred tax assets related to net operating loss carryforwards and other book-tax timing differences.

 

Liquidity and Capital Resources

 

Hancock’s primary capital requirements are for the financing of inventories and, to a lesser extent, for capital expenditures relating to store locations and the Company’s distribution facility. Funds for such purposes have historically been generated from Hancock’s operations, short-term trade credit in the form of extended payment terms from suppliers for inventory purchases, and borrowings from commercial lenders.

 

We have a history of losses over the three year period ended January 31, 2015 and we have generated positive operating cash flow in only the year ended January 31, 2015. During the years ended January 31, 2015, January 25, 2014 and January 26, 2013, the Company had net losses of $3.2 million, $1.9 million and $8.5 million, respectively and net cash provided by (used in) operating activities for the corresponding periods was $3.2 million, $(5.7) million and $(11.3) million, respectively. As a result, since fiscal 2011, it has been necessary to rely on bank borrowings for our capital needs to fund the Company’s working capital needs, its required cash contribution to the Company’s defined benefit pension plan, for capital expenditures, and losses from operations.

 

At May 2, 2015, the Company had outstanding long-term indebtedness and capital lease obligations of $87.9 million compared to $52.3 million as of January 28, 2012. As a consequence of our significant amount of indebtedness as of May 2, 2015, a significant portion of our cash flow from operations must be dedicated to interest and principal payments on our indebtedness, thereby reducing the availability of our cash flow to fund capital expenditures or other growth initiatives and other general corporate requirements, see “Item 1A. Risk Factors − Risks Related to Our Business − We have a significant amount of indebtedness, which could have important negative consequences to us” in our Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015. In addition, at May 2, 2015, the Company had limited cash resources, with cash of $2.2 million, see “Item 1A. Risk Factors − Risks Related to Our Business − Our current cash resources might not be sufficient to meet our expected near-term cash needs” in our Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015.

 

 

Our short-term and long-term liquidity needs arise primarily from our working capital requirements, required cash contributions to the defined benefit pension plan, planned capital expenditures and debt service requirements. We anticipate that capital expenditures for the fiscal year ending January 30, 2016 will be approximately $2.2 to $2.5 million, primarily for store and technology upgrades. We anticipate that we will be able to satisfy our short-term and long-term liquidity needs highlighted above through the next twelve months with available cash, proceeds from cash flows from operations, short-term trade credit, borrowings under our revolving credit facility (the “Revolver”) and other sources of financing. As of May 2, 2015, we have $6.3 million available to borrow under the Revolver. We consolidate our daily cash receipts into a centralized account. In accordance with the terms of our $100.0 million Revolver, on a daily basis, all collected and available funds are applied to the outstanding loan balance. We then determine our daily cash requirements and request those funds from the Revolver availability.

 

Our ability to improve our liquidity in future periods will depend on generating positive operating cash flow, primarily through comparable store sales increases, improved gross margin and controlling our expenses, which in turn, may be impacted by prevailing economic conditions and other financial and business factors, some of which are beyond our control, see “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015.

 

Hancock’s cash flow related information for the first thirteen weeks of fiscal 2015 and 2014 follows:

 

		Thirteen Weeks Ended
(in thousands)		May 2,				April 26,
		2015				2014
Net cash flows provided by (used in):
Operating activites		$	(1,230	)		$	(2,193	)
Investing activities			(419	)			(964	)
Financing activites			947				3,269

 

 

Operating Activities

 

In the first quarter of 2015, the net loss plus non-cash adjustments used $2.0 million of cash compared to $0.9 million provided for the same period of 2014. This can be primarily attributed to the larger net loss incurred in the first quarter of 2015 as compared to 2014 partially offset by the non-cash charge for amortization of deferred loan costs which was inflated by $0.9 million due to the early termination of the amended and restated loan and security agreement with General Electric Capital Corporation on April 22, 2015. A decrease in inventory of $2.9 million, receivables and prepaid expensed of $1.5 million less reductions in accounts payable and accrued liabilities support of $1.9 million and $1.1 million, respectively, resulted in the $1.2 million of net cash used in operating activities for the first quarter of 2015.

 

In the first quarter of 2014, the net loss plus non-cash adjustments to reconcile net loss to cash flow used in operations provided $0.9 million, an inventory decrease of $0.5 million less a $1.9 million reduction in accounts payable support, a $1.2 million reduction in accrued liabilities and $0.7 million decrease in pension related liabilities resulted in the $2.2 million of net cash used in operating activities.

 

 

Investing Activities

 

Cash used for investing activities consists primarily of purchases of property and equipment. Capital expenditures during the first thirteen weeks of 2015 consisted primarily of store fixtures and leasehold improvements for two new stores and two relocated units. Capital expenditures in the first quarter of the prior year consisted primarily of store fixtures and leasehold improvements for two relocated units, and development cost related to the re-launch of the Company website.

 

Financing Activities

 

For the first thirteen weeks of 2015, working capital needs, expenditures for investing activities discussed above, the required contribution to the defined benefit pension plan and payment of $2.2 million of debt issuance costs related to the new financing in April 2015 increased the outstanding balance on the revolver by $0.7 million and the term loan by $2.5 million. During the first thirteen weeks of 2014, working capital needs, expenditures for investing activities discussed above and the required contribution to the defined benefit pension plan increased outstanding debt by $3.3 million.

 

Credit Facilities

 

The following should be read in conjunction with Note 4 to the Consolidated Financial Statements included in this report, a Current Report on Form 8-K filed with the SEC on April 28, 2015 and Note 5 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2015 filed with the SEC on May 1, 2015.

 

As of May 2, 2015, the Company had outstanding borrowings under the Revolver of $59.8 million and $17.5 million under the term loan facility entered into on April 22, 2015 (the “Term Loan”), and amounts available to borrow of $6.3 million.

 

At May 2, 2015, Hancock had commitments under the above revolving credit facility for $47 thousand of documentary letters of credit, which support purchase orders for merchandise. Hancock also has standby letters of credit for $3.0 million and backstop letters of credit issued to its previous lender for $5.4 million to guarantee payment of potential insurance claims, shipments of inventory, security bonds and freight charges.

 

As of May 2, 2015, the Company had an outstanding balance of $8.2 million on the Floating Rate Secured Notes due 2017 (the “Notes”).

 

Off-Balance Sheet Arrangements

 

Hancock has no off-balance sheet financing arrangements. Hancock leases its retail fabric store locations mainly under non-cancelable operating leases. Four of the Company’s store leases qualified for capital lease treatment and are reflected on the Company’s balance sheet. Future payments under the operating leases are excluded from the Company’s balance sheet.

 

Contractual Obligations and Commercial Commitments

 

Hancock has an arrangement within its revolving credit agreement that provides up to $15.0 million in letters of credit. At May 2, 2015, Hancock had commitments of $47 thousand, under documentary letters of credit, which support purchase orders for merchandise. Hancock also has standby letters of credit for $3.0 million and backstop letters of credit issued to its previous lender for $5.4 million to guarantee payment of potential insurance claims, shipments of inventory, security bonds and freight charges. Hancock leases its retail fabric store locations under operating leases expiring at various dates through 2026.

 

 

The Company has no standby repurchase obligations or guarantees of other entities' debt.

 

For further information on our contractual obligations, please refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Contractual Obligations and Commercial Commitments” as presented in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

Critical Accounting Policies and Estimates

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to adopt accounting policies and make significant judgments and estimates to develop amounts reflected and disclosed in the financial statements. In many cases, there are alternative policies or estimation techniques that could be used. We maintain a process to review the application of our accounting policies and to evaluate the appropriateness of the many estimates that are required to prepare the financial statements of a large corporation. However, even under optimal circumstances, estimates routinely require adjustment based on changing circumstances and the receipt of new or better information. There have been no significant changes to our accounting policies and estimates as discussed under Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies and Estimates” in our Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

Related Party Transactions

 

See Note 14 to the Company’s Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015, filed with the SEC on May 1, 2015, for details regarding the related party transactions that the Company has entered into.

 

The Company has no other balances with related parties, nor has it had any other material transactions with related parties during the thirteen week period ended May 2, 2015.

 

Effects of Inflation

 

Inflation in labor and occupancy costs could significantly affect Hancock's operations. Many of Hancock's employees are paid hourly rates related to federal and state minimum wage requirements; accordingly, any increases in those requirements will affect Hancock. In addition, payroll taxes, employee benefits, and other employee costs continue to increase, and the full impact of the recently enacted health care reform legislation will not be known for several years. Health insurance costs, in particular, continue to rise at a high rate in the United States each year, and higher employer contributions to Hancock’s pension plan could be necessary if investment returns are weak. Costs of leases for new store locations remain stable, but renewal costs of older leases continue to increase. 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 are the most effective tools for coping with increased costs and expenses.

 

Seasonality

 

Hancock's business is seasonal. Peak sales periods occur during the fall and early spring weeks, while the lowest sales period occurs during the summer. Working capital requirements needed to finance our operations fluctuate during the year and reach their highest levels during the second and third fiscal quarters as we increase our inventory in preparation for our peak selling season during the fourth quarter.

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

 

Hancock did not hold derivative financial or commodity instruments at May 2, 2015.

 

Interest Rate Risk

 

We are exposed to financial market risks, including changes in interest rates. At our option, borrowings under the revolving credit facility bear interest at a rate equal to, either (a) a LIBOR rate determined by reference to the offered rate for deposits in dollars for the interest period relevant to such borrowing or (b) a base rate, in each case plus an applicable margin and adjusted for certain additional costs and fees and the term loan bears interest at a LIBOR rate. As of May 2, 2015, we had borrowings outstanding of approximately $59.8 million under the Revolver and $17.5 million under the Term Loan. If interest rates increased 100 basis points, our annual interest expense would increase approximately $773,000, assuming borrowings under the Revolver and Term Loan as existed at May 2, 2015.

 

 

In addition to the Revolver and Term Loan, as of May 2, 2015 the Company has outstanding Notes for $8.2 million on which interest is payable quarterly on the issuance date anniversary. The quarterly interest is payable at LIBOR plus 12.0% on the Notes. If interest rates increased 100 basis points, our annual interest expense would increase $82,000, assuming borrowings under the Notes as existed at May 2, 2015.

 

Foreign Currency Risk

 

All of the Company’s business is transacted in U.S. dollars and, accordingly, valuation changes in the dollar against other currencies can affect product costs although this did not significantly impact the thirteen week period ended May 2, 2015. As of May 2, 2015, the Company had no financial instruments outstanding that were sensitive to changes in foreign currency exchange rates.

 

 

ITEM 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including our President and Chief Executive Officer (principal executive officer) and Executive Vice President and Chief Financial Officer (principal financial officer), as appropriate, to allow timely decisions regarding the required disclosures.

 

In connection with the preparation of this Quarterly Report on Form 10-Q for the quarterly period ended May 2, 2015, the Company’s management, under the supervision and with the participation of the Company’s President and Chief Executive Officer and Executive Vice President and Chief Financial Officer, performed an evaluation of the effectiveness of our disclosure controls and procedures (as such term is defined in the Rules 13a-15(e) and 15d-15(e) under the Exchange Act).  Based upon this evaluation, the Company’s principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of May 2, 2015.

 

 

Changes in Internal Control Over Financial Reporting

 

There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) within the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

“Item 3. Legal Proceedings” of our Form 10-K for the fiscal year ended January 31, 2015 includes a discussion of other legal proceedings. There have been no material changes from the legal proceedings described in our Form 10-K.

 

 

ITEM 1A. RISK FACTORS

 

The risk factors listed in Part I “Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015, should be considered with the information provided elsewhere in this Quarterly Report on Form 10-Q, which could materially adversely affect the Company’s business, financial condition or results of operations.  There are no material changes to the risk factors disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2015.

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In June of 2000 the Board of Directors authorized the repurchase of up to 2,000,000 shares of the Company’s Common Stock from time to time when warranted by market conditions. There have been 1,756,755 shares purchased under this authorization through May 2, 2015, and the number of shares that may yet be purchased under this authorization is 243,245. The Company did not repurchase any shares in the market during the period covered by this Quarterly Report, but did accept shares in settlement of tax withholding obligations on restricted shares.

 

On March 18, 2015, the Company granted to an employee of the Company (i) options for an aggregate of 20,000 shares of common stock, at an option exercise price of $0.65, subject to time vesting with 25% vesting on each of March 18, 2016, March 18, 2017, March 18, 2018, and March 18, 2019, and (ii)  restricted stock grant for an aggregate of 10,000 shares subject to time vesting with 20% vesting on each of March 18, 2016, March 18, 2017, March 18, 2018, March 18, 2019 and March 18, 2020.

 

All of the issuances above were pursuant to the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

 

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable

 

 

ITEM 5. OTHER INFORMATION

 

On June 16, 2015, the Compensation Committee of the Board of Directors of Hancock Fabrics, Inc. (the “Company”) approved an extension of the term of the Company’s employment agreement with Steven R. Morgan, the Company’s President and Chief Executive Officer, from October 17, 2018 through January 26, 2019. In all other respects, the terms of Mr. Morgan’s employment agreement continue in effect.  The foregoing description is intended only to be a summary of the full text of the agreement, which the Company plans to file as an exhibit to a subsequent Quarterly Report on Form 10-Q.

 

 

ITEM 6. EXHIBITS

 

3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 31, 2008)
3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 8, 2012)
10.1	Credit Agreement dated April 22, 2015 by and among Hancock Fabrics, Inc., HF Merchandising, Inc., Hancock Fabrics of MI, Inc., Hancockfabrics.com, Inc., Hancock Fabrics, LLC, HF Enterprises, Inc., HF Resources, Inc., the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, collateral agent and swing line lender, and GACP Finance Co., LLC, as term agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2015)
10.2	Guaranty dated April 22, 2015 by and among HF Enterprises, Inc., HF Resources, Inc., Wells Fargo Bank, National Association, as administrative agent and collateral agent, for its own benefit and the benefit of the other credit parties pursuant to the credit agreement, and the credit parties pursuant to the credit agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 28, 2015)
10.3	Security Agreement dated April 22, 2015 by and among Hancock Fabrics, Inc., HF Merchandising, Inc., Hancock Fabrics of MI, Inc., Hancockfabrics.com, Inc., Hancock Fabrics, LLC, HF Enterprises, Inc., and HF Resources, Inc., in favor of Wells Fargo Bank, National Association, as collateral agent for the credit parties pursuant to the credit agreement, as pledgee, assignee and secured party (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 28, 2015)

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002
101 INS	XBRLInstance Document
101 SCH	XBRLTaxonomy Extension Schema Document
101 CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF	XBRL Taxonomy Extension Definition Linkbase Document
101 LAB	XBRL Taxonomy Extension Label Linkbase Document
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, 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/ James Brown
		James Brown
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

Date: June 16, 2015

 

 

EXHIBIT INDEX

 

 

Exhibit No.	Description
3.1	Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed on July 31, 2008)
3.2	Amended and Restated By-Laws (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on June 8, 2012)
10.1	Credit Agreement dated April 22, 2015 by and among Hancock Fabrics, Inc., HF Merchandising, Inc., Hancock Fabrics of MI, Inc., Hancockfabrics.com, Inc., Hancock Fabrics, LLC, HF Enterprises, Inc., HF Resources, Inc., the lenders from time to time party thereto, Wells Fargo Bank, National Association, as administrative agent, collateral agent and swing line lender, and GACP Finance Co., LLC, as term agent (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 28, 2015)
10.2	Guaranty dated April 22, 2015 by and among HF Enterprises, Inc., HF Resources, Inc., Wells Fargo Bank, National Association, as administrative agent and collateral agent, for its own benefit and the benefit of the other credit parties pursuant to the credit agreement, and the credit parties pursuant to the credit agreement (incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on April 28, 2015)
10.3	Security Agreement dated April 22, 2015 by and among Hancock Fabrics, Inc., HF Merchandising, Inc., Hancock Fabrics of MI, Inc., Hancockfabrics.com, Inc., Hancock Fabrics, LLC, HF Enterprises, Inc., and HF Resources, Inc., in favor of Wells Fargo Bank, National Association, as collateral agent for the credit parties pursuant to the credit agreement, as pledgee, assignee and secured party (incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed on April 28, 2015)

31.1	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
31.2	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities Exchange Act of 1934
32.1	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The Sarbanes-Oxley Act of 2002
101 INS	XBRLInstance Document
101 SCH	XBRLTaxonomy Extension Schema Document
101 CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF	XBRL Taxonomy Extension Definition Linkbase Document
101 LAB	XBRL Taxonomy Extension Label Linkbase Document
101 PRE	XBRL Taxonomy Extension Presentation Linkbase Document

 

 

24

Exhibit 31.1

Certification of Chief Executive Officer
Pursuant to Rule 13a-14(a) Under
The Securities Exchange Act of 1934

 

 

 

I, Steven R. Morgan, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended May 2, 2015 of Hancock Fabrics, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

Date: June 16, 2015

 

	/s/ Steven R. Morgan
	Steven R. Morgan
	President and Chief Executive Officer

 

 

 

Exhibit 31.2

 

Certification of Chief Financial Officer
Pursuant to Rule 13a-14(a) Under
The Securities Exchange Act of 1934

 

I, James B. Brown, certify that:

 

1.	I have reviewed this quarterly report on Form 10-Q for the quarter ended May 2, 2015 of Hancock Fabrics, Inc.;

 

2.	Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.	Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4.

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

a)     Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

b)     Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

c)     Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

d)     Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

 

5.	The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

 

a)     All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

b)     Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

 

 

Date: June 16, 2015

 

	/s/ James B. Brown
	James B. Brown Executive Vice President and Chief Financial Officer (Principal Financial Officer)

 

Exhibit 32.1

 

Certification of Chief Executive Officer and Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant To

Section 906 Of The Sarbanes-Oxley Act of 2002

 

In connection with the Quarterly Report of Hancock Fabrics, Inc. (“Hancock”) on Form 10-Q for the period ended May 2, 2015 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of Steven R. Morgan, President and Chief Executive Officer of Hancock and James B. Brown, Executive Vice President and Chief Financial Officer of Hancock, certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of their knowledge:

 

1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Hancock.

 

 

Date: June 16, 2015

 

 

 

	/s/ Steven R. Morgan
	Steven R. Morgan President and Chief Executive Officer
	/s/ James B. Brown
	James B. Brown Executive Vice President and Chief Financial Officer (Principal Financial Officer)