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Hancock makes significant progress in remedying merchandising

27
May '10
Hancock Fabrics, Inc. announced financial results for its first quarter ended May 1, 2010.

Financial highlights for the first quarter include:

• Net sales for the quarter were $63.1 million compared to $64.1 million for first quarter of last year, and comparable store sales decreased 2.0% compared to a 2.3% increase in the previous year.
• Operating income was $17,000 in the quarter compared to $0.6 million in the first quarter last year.
• Net loss was $1.3 million, or $0.07 per basic share, in the first quarter of fiscal 2010 compared to a loss of $0.9 million, or $0.05 per share in the first quarter of fiscal 2009.
• Adjusted EBITDA for the quarter was $1.6 million, a decrease of $0.6 million over the same period last fiscal year.
• The amount of cash generated from operations before reorganization activities increased by $146,000 to $2.1 million during the quarter.
• Inventories have been reduced by $7.6 million compared to the same period last year, ending the quarter at $93.0 million.
• At quarter end, the Company had outstanding borrowings under its revolving line of credit of $13.7 million and outstanding letters of credit of $7.7 million. The Company increased its borrowings by $102,000 during the quarter. Additional amounts available to borrow under its revolving line of credit at the end of the quarter were $43.5 million. The balance of the Company's subordinate debt was $21.6 million at quarter end, and the warrant discount on this debt was $7.6 million.

Jane Aggers, President and Chief Executive Officer noted, "While our results for the quarter were below our expectations, we made significant progress in remedying merchandising and inventory issues carried forward from last year. This resulted in a temporary impact on gross margins for the quarter. Store revenues began the quarter slowly but have steadily increased through the end of the quarter and this trend has continued into the second quarter."

Operating Results
Gross margin for the quarter of 43.9% was a 120 basis point decrease over the 45.1% of the prior year. This decrease reflects a 160 basis point increase in merchandise costs and a 40 basis point increase in freight costs offset by an 80 basis point improvement in sourcing and warehousing expenses. Additional mark downs were taken during the quarter to accelerate the disposal of fall/winter merchandise which resulted in the increase in merchandise costs. As inventory levels have risen since year end, additional shipments were made to our retail locations from our distribution center which has raised freight costs. This same increase in inventory has driven down our sourcing and warehousing costs.

Selling, general and administrative expenses for the quarter have been reduced by $0.6 million to $26.6 million (42.2% of sales) from $27.2 million (42.4% of sales) in the prior year. Savings realized during the quarter in retail and corporate overhead were partially offset by the shift of advertising costs from future quarters to the first quarter.

Store Openings, Closings and Remodels
During the quarter, the Company opened one store, remodeled 11 locations, and ended the quarter with 266 stores.

Hancock Fabrics, Inc. is committed to nurturing creativity with a complete selection of fashion and home decorating textiles, sewing accessories, needlecraft supplies and sewing machines. The Company currently operates 266 retail stores in 37 states and an Internet store.

Hancock Fabrics Inc


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