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| 8-K - FORM 8-K - HANCOCK FABRICS INC | t70480_8k.htm |
Exhibit 99.1
HANCOCK FABRICS ANNOUNCES
FISCAL 2010 FINANCIAL RESULTS
BALDWYN, MS, April 26, 2011 – Hancock Fabrics, Inc. (OTC symbol: HKFI) today announced financial results for its 2010 fiscal year and fourth quarter ended January 29, 2011.
Fiscal 2010 financial highlights include:
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Net sales for the year were $275.5 million compared with $274.1 million in the previous year, and comparable store sales were flat over the last two years.
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Operating income for the year was a loss of $5.0 million, a decrease of $12.7 million from the previous year. Excluding one-time charges incurred in the fourth quarter totaling $9.5 million, operating income for the year was $4.5 million, a decrease of $3.2 million from the previous year. One-time items included a $6.7 million charge for inventory obsolescence, a $1.5 million charge for asset impairment, and $1.3 million of severance related costs associated with the CEO transition.
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Adjusted EBITDA, which excludes the one-time items described above, totaled $11.0 million, a decrease of $3.3 million over fiscal 2009.
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Inventories have been reduced by $3.7 million compared to the same period last year, ending the year at $87.8 million.
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At year end, the Company had reduced outstanding borrowings under its revolving line of credit by $0.5 million, to a balance of $13.1 million, and had outstanding letters of credit of $7.5 million. The Note balance was $21.6 million and the warrant discount on the Notes was $5.8 million. Additional amounts available to borrow under its revolving line of credit at fiscal year-end were $43.8 million.
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Financial highlights for the fourth quarter include:
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Net sales for the quarter were $78.4 million compared with $77.7 million in the fourth quarter last year, and comparable same store sales increased 0.7%, compared with a 1.3% decrease in the previous year – a 200 basis point improvement.
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Operating income for the quarter was a loss of $8.4 million, a decrease of $11.7 million compared to a $3.3 million profit in the previous year’s fourth quarter. Excluding the one-time charges totaling $9.5 million in the current quarter, operating income was $1.1 million, a decrease of $2.2 million versus the fourth quarter of fiscal 2009.
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Adjusted EBITDA for the quarter was $2.7 million, a decrease of $2.4 million over the same period last fiscal year.
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[1]
Steven R. Morgan, Interim President and Chief Executive Officer since February, commented, “We incurred significant one-time non-cash charges in the fourth quarter as we took actions to improve our business. The most significant charge was related to anticipated markdowns on aged products. These markdowns have been implemented, and will allow us the scope to liquidate these aged goods quicker as we move forward and ensure we have current, relevant merchandise for our customers. I am confident that we have identified, segregated, properly priced and positioned this product to provide a great value to our customers and to better position ourselves for new products in the remainder of the year.”
Mr.Morgan continued, “This business has significant opportunity and a solid foundation is in place for its growth. The short term will be challenging as we focus on improving certain areas – specifically store presentation, refinement of craft business, and improvement to our replenishment process.” Mr.Morgan concluded, “We are spending every minute capitalizing on these opportunities that will be key to our success and our ability to enhance the total customer experience. As a result, we believe we are well positioned to begin seeing significant improvement in the fall season.”
Operating Results
For the year, gross margin decreased by 40 basis points to 44.0% excluding the one-time inventory obsolescence charge of $6.7 million. This decline was driven by a 60 basis point increase in merchandise cost due to increased promotion activity and increase in cotton pricing which we believe may have peaked in the fourth quarter, a 20 basis point increase in freight costs due to fuel surcharges, offset by a 40 basis point decrease in sourcing and warehousing costs.
Gross margin for the fourth quarter of 41.5% excluding the one-time charge was a 70 basis point increase compared to the 40.8% of the prior year. This increase reflects a 70 basis point reduction in merchandise cost, a 20 basis point reduction in sourcing and warehousing, offset by a 20 basis point increase in freight costs.
For the full year, selling, general and administrative expenses excluding the one-time asset impairment charge of $1.5 million and severance costs of $1.3 million have increased by $2.6 million to $112.3 million (40.8% of sales) from $109.7 million (40.0% of sales) last year. Selling, general and administrative expenses for the fourth quarter excluding one-time charges increased to $30.2 million (38.5% of sales) from $27.4 million (35.2% of sales) in the prior year. Increases have been driven by escalations in retail operating costs associated with insurance claims, utilities, credit card fees and store maintenance.
Store Openings, Closings and Remodels
During the fiscal year, the Company opened one store, closed one store, remodeled twelve stores, relocated seven existing stores and ended the year with 265 stores.
[2]
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 264 retail stores in 37 states and an Internet store at www.hancockfabrics.com.
Contact:
Robert W. Driskell
Executive Vice President and
Chief Financial Officer
662.365.6112
Supplemental Disclosures Regarding Non-GAAP Financial Information
The Company has presented Adjusted Earnings before Interest, Taxes, Depreciation and Amortization (“Adjusted 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 Adjusted EBITDA as net earnings before interest, income taxes, discontinued operations, depreciation and amortization, reorganization expenses and significant one-time items. The Company uses Adjusted 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 Adjusted EBITDA is not a measure of operating performance or liquidity calculated in accordance with generally accepted accounting principles in the United States of America (“GAAP”), this measure should not be considered in isolation of, or as a substitute for, net earnings (loss), as an indicator of operating performance, or net cash provided by operating activities as an indicator of liquidity. Our computation of Adjusted EBITDA may differ from similarly titled measures used by other companies. As Adjusted EBITDA excludes certain financial information compared with net earnings (loss) and net cash 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 Adjusted EBITDA to net earnings (loss) and net cash provided by operating activities.
Comments in this news release that are not historical facts, including statements about our management team, 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, general economic trends, intense competition in our industry, adverse discounting actions taken by competitors, changes in consumer demand or purchase patterns, the terms of our significant indebtedness, delays or interruptions in the flow of merchandise between the Company’s suppliers and/or its distribution center and its stores, rising fuel costs, tightening of purchase terms by suppliers and their factors, a disruption in the Company’s data processing services and other risks and uncertainties discussed in the Company’s Securities and Exchange Commission filings. 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.
[3]
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HANCOCK FABRICS, INC.
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CONSOLIDATED BALANCE SHEETS
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January 29,
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January 30,
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(in thousands, except for share amounts)
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2011
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2010
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Assets
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Current assets:
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Cash and cash equivalents
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$ | 2,372 | $ | 2,493 | ||
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Receivables, less allowance for doubtful accounts
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3,841 | 3,469 | ||||
| Inventories | 87,804 | 91,495 | ||||
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Prepaid expenses
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2,465 | 1,485 | ||||
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Total current assets
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96,482 | 98,942 | ||||
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Property and equipment, net
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39,335 | 41,687 | ||||
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Goodwill
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3,139 | 3,210 | ||||
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Other assets
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1,967 | 4,707 | ||||
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Total assets
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$ | 140,923 | $ | 148,546 | ||
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Liabilities and Shareholders' Equity
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Current liabilities:
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Accounts payable
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$ | 17,842 | $ | 18,638 | ||
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Accrued liabilities
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14,937 | 15,113 | ||||
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Pre-petition obligations
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730 | 1,193 | ||||
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Total current liabilities
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33,509 | 34,944 | ||||
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Long-term debt obligations, net
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28,784 | 26,942 | ||||
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Capital lease obligations
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3,072 | 3,184 | ||||
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Postretirement benefits other than pensions
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2,337 | 2,150 | ||||
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Pension and SERP liabilities
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30,506 | 27,017 | ||||
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Other liabilities
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7,878 | 7,097 | ||||
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Total liabilities
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106,086 | 101,334 | ||||
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Commitments and contingencies
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Shareholders' equity:
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Common stock, $.01 par value; 80,000,000 shares authorized;
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33,466,455 and 33,283,944 issued and 20,068,327
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and 19,902,148 outstanding, respectively
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335 | 333 | ||||
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Additional paid-in capital
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89,671 | 89,128 | ||||
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Retained earnings
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116,234 | 126,695 | ||||
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Treasury stock, at cost, 13,398,128 and 13,381,796
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shares held, respectively
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(153,731 | ) | (153,698 | ) | ||
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Accumulated other comprehensive loss
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(17,672 | ) | (15,246 | ) | ||
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Total shareholders' equity
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34,837 | 47,212 | ||||
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Total liabilities and shareholders' equity
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$ | 140,923 | $ | 148,546 | ||
[4]
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HANCOCK FABRICS, INC.
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CONSOLIDATED STATEMENTS OF OPERATIONS
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| Thirteen Weeks Ended | Fifty-two Weeks Ended | |||||||||||||||
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January 29,
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January 30,
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January 29,
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January 30,
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(in thousands, except per share amounts)
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2011
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2010
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2011
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2010
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Sales
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$ | 78,453 | $ | 77,678 | $ | 275,465 | $ | 274,058 | ||||||||
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Cost of goods sold
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52,618 | 45,973 | 160,820 | 152,341 | ||||||||||||
| Gross profit | 25,835 | 31,705 | 114,645 | 121,717 | ||||||||||||
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Selling, general and administrative expense
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33,028 | 27,370 | 115,098 | 109,681 | ||||||||||||
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Depreciation and amortization
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1,182 | 1,049 | 4,495 | 4,329 | ||||||||||||
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Operating income
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(8,375 | ) | 3,286 | (4,948 | ) | 7,707 | ||||||||||
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Reorganization expense, net
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- | 163 | 485 | 755 | ||||||||||||
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Interest expense, net
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1,156 | 1,170 | 4,825 | 5,114 | ||||||||||||
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Income (loss) from continuing operations before income taxes
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(9,531 | ) | 1,953 | (10,258 | ) | 1,838 | ||||||||||
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Income taxes
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232 | 136 | 232 | 200 | ||||||||||||
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Income (loss) from continuing operations
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(9,763 | ) | 1,817 | (10,490 | ) | 1,638 | ||||||||||
| Earnings from discontinued operations (net of tax expense of $0, $0, $0 and $0) | - | 98 | 29 | 150 | ||||||||||||
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Net income (loss)
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$ | (9,763 | ) | $ | 1,915 | $ | (10,461 | ) | $ | 1,788 | ||||||
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Basic income (loss) per share:
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Income (loss) from continuing operations
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$ | (0.49 | ) | $ | 0.09 | $ | (0.53 | ) | $ | 0.08 | ||||||
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Earnings from discontinued operations
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- | 0.01 | - | 0.01 | ||||||||||||
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Net income (loss)
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$ | (0.49 | ) | $ | 0.10 | $ | (0.53 | ) | $ | 0.09 | ||||||
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Diluted income (loss) per share:
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Income (loss) from continuing operations
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$ | (0.49 | ) | $ | 0.07 | $ | (0.53 | ) | $ | 0.08 | ||||||
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Earnings from discontinued operations
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- | 0.01 | - | 0.01 | ||||||||||||
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Net income (loss)
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$ | (0.49 | ) | $ | 0.08 | $ | (0.53 | ) | $ | 0.09 | ||||||
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Weighted average shares outstanding:
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| Basic | 19,756 | 19,888 | 19,684 | 19,349 | ||||||||||||
| Diluted | 19,756 | 25,079 | 19,684 | 20,925 | ||||||||||||
[5]
Reconciliation of Non-GAAP Financial Information
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Hancock Fabrics, Inc.
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Reconciliation of Adjusted EBITDA
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| Thirteen Weeks Ended | Fifty-two Weeks Ended | |||||||||||||||
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January 29,
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January 30,
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January 29,
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January 30,
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(in thousands)
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2011
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2010
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2011
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2010
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Net cash provided by operating activities
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before reorganization activities
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$ | 5,722 | $ | 10,171 | $ | 6,743 | $ | 23,710 | ||||||||
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Depreciation and amortization, including cost of goods sold
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(1,651 | ) | (1,831 | ) | (6,538 | ) | (6,619 | ) | ||||||||
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Amortization of deferred loan costs
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(61 | ) | (62 | ) | (246 | ) | (247 | ) | ||||||||
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Amortization of bond discount
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(583 | ) | (583 | ) | (2,331 | ) | (2,331 | ) | ||||||||
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Interest paid-in-kind by issuance of notes payable
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- | - | - | (694 | ) | |||||||||||
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Stock compensation expense
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(70 | ) | (204 | ) | (509 | ) | (968 | ) | ||||||||
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Inventory valuation reserve
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(6,650 | ) | - | (6,650 | ) | - | ||||||||||
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Impairment on property and equipment, goodwill, and other assets
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(1,523 | ) | - | (1,523 | ) | - | ||||||||||
| Other | 279 | 288 | (21 | ) | 98 | |||||||||||
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Reorganization expense, net
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- | (163 | ) | (485 | ) | (755 | ) | |||||||||
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Changes in assets and liabilities
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(5,226 | ) | (5,701 | ) | 1,099 | (10,406 | ) | |||||||||
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Net income (loss)
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(9,763 | ) | 1,915 | (10,461 | ) | 1,788 | ||||||||||
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Earnings from discontinued operations
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- | (98 | ) | (29 | ) | (150 | ) | |||||||||
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Income taxes
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232 | 136 | 232 | 200 | ||||||||||||
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Interest expense, net
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1,156 | 1,170 | 4,825 | 5,114 | ||||||||||||
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Reorganization expense, net
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- | 163 | 485 | 755 | ||||||||||||
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Depreciation and amortization, including cost of goods sold
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1,651 | 1,831 | 6,538 | 6,619 | ||||||||||||
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One-time charges
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Former CEO severance
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1,272 | - | 1,272 | - | ||||||||||||
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Impairment on property and equipment, goodwill, and other assets
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1,523 | - | 1,523 | - | ||||||||||||
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Inventory obsolescence
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6,650 | - | 6,650 | - | ||||||||||||
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Adjusted EBITDA
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$ | 2,721 | $ | 5,117 | $ | 11,035 | $ | 14,326 | ||||||||
[6]