HKF Hancock Fabrics

Hancock Fabrics, Inc. (NYSE: HKF), today announced the unaudited results of 2005's second quarter. Sales in the 13 weeks ended July 30, 2005 decreased 7.3% to $83.2 million from $89.8 million in the same quarter of 2004. The Company reported a net loss of $5.4 million, or $.29 per diluted share, compared with a loss of $2.7 million, or $.15 per diluted share, in the second quarter a year ago. The earnings comparison was negatively affected by an increase in the government's Producer Price Index that the Company uses to measure inflation in inventories, which resulted in a higher LIFO charge to cost of sales this year. Although having no cash impact, the LIFO charge caused a negative swing in the after-tax loss comparison of $.05 per share. In commenting on the results, Jane Aggers, Chief Executive Officer, stated, "A decline in comparable store sales of 8.1% was the overriding factor weighing on the second quarter's results, although the effect was partially mitigated by a higher gross margin and control of expenses. Even with the much higher non-cash LIFO charge, gross margin increased over the previous year's second quarter, representing the first quarterly increase in margin since 2003. Also, selling, general and administrative expense dollars continued to be well controlled, despite having 13 more stores, incurring incremental costs in connection with the ongoing store makeovers and contending with normal expense inflationary pressures," Aggers said. "As reported over the past few months, we have been extremely active in our efforts to develop and implement a strategy to better connect with our customers in advance of the fast approaching fall/winter selling season. The staff in our stores are spending considerable energy on the makeover process designed to better accommodate customer shopping preferences, while the merchants have been working to enhance our core merchandise categories. The recent completion of a $110 million credit facility has helped us finance these merchandise enhancements during the seasonal build of inventory, while also providing a much greater level of unused borrowing availability that ensures continuing strong relations with our valued supplier community," Aggers added. "We enter the second half of the year focused on our customer needs, with expanded assortments in fleece and fashion apparel fabric, upholstery and drapery fabric for the home, designer and name-brand quilting cottons for the serious quilter, specialty yarns for knitters, and sewing accessories for everyone, ranging from sewing machines to instructional books to ribbon and trimmings," Aggers concluded. 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 CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (000's omitted, except for per share amounts) 13 Weeks 13 Weeks 26 Weeks 26 Weeks July 30, August 1, July 30, August 1, 2005 2004 2005 2004 --------- --------- ---------- --------- Sales $83,244 $89,767 $181,084 $194,856 Cost of Goods Sold 42,678 46,301 93,812 98,907 --------- --------- ---------- --------- Gross Profit 40,566 43,466 87,272 95,949 --------- --------- ---------- --------- Expenses: Selling, general & administrative 46,121 45,706 95,446 95,085 Depreciation & amortization 2,191 1,802 4,425 3,512 --------- --------- ---------- --------- 48,312 47,508 99,871 98,597 --------- --------- ---------- --------- Operating Loss (7,746) (4,042) (12,599) (2,648) Interest Expense, net 700 168 1,032 280 --------- --------- ---------- --------- Loss Before Income Taxes (8,446) (4,210) (13,631) (2,928) Income Taxes (3,066) (1,528) (4,948) (1,062) --------- --------- ---------- --------- Net Loss $(5,380) $(2,682) $ (8,683) $ (1,866) ========= ========= ========== ========= Loss Per Share Basic $ (0.29) $ (0.15) $ (0.47) $ (0.10) ========= ========= ========== ========= Diluted $ (0.29) $ (0.15) $ (0.47) $ (0.10) ========= ========= ========== ========= Weighted Average Shares Outstanding: Basic 18,434 18,208 18,386 18,101 Diluted 18,434 18,208 18,386 18,101 LIFO Charge (Credit) Included in Cost of Goods Sold $ 1,600 $ (50) $ 2,600 $ (200) CONSOLIDATED BALANCE SHEET (in thousands) July 30, August 1, 2005 2004 ---------- --------- ASSETS: Current assets: Cash and cash equivalents $ 3,467 $ 3,775 Inventories 170,818 159,902 Income taxes refundable 4,273 563 Other current assets 3,505 4,179 ---------- --------- Total current assets 182,063 168,419 Property and equipment, at depreciated cost 69,436 68,317 Pension payment in excess of required contribution 12,966 14,876 Other noncurrent assets 12,508 13,480 ---------- --------- $276,973 $265,092 ========== ========= LIABILITIES AND SHAREHOLDERS' EQUITY: Current liabilities: Accounts payable and accrued liabilities $ 60,443 $ 60,762 Income taxes 4,019 3,892 ---------- --------- Total current liabilities 64,462 64,654 Long-term debt obligations 60,169 41,000 Lease financing obligation 1,741 0 Postretirement benefits other than pensions 22,878 22,689 Other noncurrent liabilities 9,614 9,330 Shareholders' equity 118,109 127,419 ---------- --------- $276,973 $265,092 ========== ========= *T