Home » FOCUS » Hancock Fabrics runs into a little snag this spring
Higher capital expenses will return to normal in FY2005

Hancock Fabrics runs into a little snag this spring

TUPELO — Even though Hancock Fabrics Inc. (NYSE: HKF) is among Mississippi’s most successful public companies, CEO Larry G. Kirk is looking for improvement.

“First quarter results were very disappointing,” said Kirk. “Although normal store operating costs were reasonably well controlled, nonrecurring expenses were magnified by the negative leverage of lower comparable store sales. In hindsight, we did not have a strong enough offering of spring merchandise, and it was late reaching our stores as a result of the transitioning of distribution operations to our new Baldwyn facility. Although customer traffic increased from a year ago, our average sale was lower because of the shortage and lateness of spring product.”

Because most consumers were buying goods at lower price points, retail stores reported more activity in seasonal clearance items, placing pressure on gross margins, said Kirk.

“In addition to extra overtime, temporary labor and transport costs to complete the distribution center move in February, other nonrecurring costs in the quarter served to push expense percentages higher, given the negative sales leverage,” said Kirk.

First quarter sales, which ended May 2, declined 2.4% to $105.1 million, from $107.6 million a year ago. Comparable store sales decreased 3.2%, following a 4.2% increase last year. (In 2002, Hancock reported sales of $435 million, up 6%. Last year, company sales topped $443 million, up 1.2%.)

“Inventories were up about 3.3% from a year ago as a result of several product lines that have been added or expanded in the last 12 months,” said Kirk. “However, seasonal clearance activity offset some of the increase from new items.”

Last year, Hancock Fabrics expanded its north Lee County distribution center, with plans to move all operations from its 473,000-square-foot West Main Street facility by the end of August. Even though several buying groups have expressed interest in the downtown facility, at press time, it has not yet been sold.

The move included the construction of an L-shaped 80,000-square-foot building to house the company’s corporate staff of 80 and 320 distribution center employees at the northeast corner of its 475,000-square-foot distribution center, the former Catalina Lighting building on U.S. 45 in South Baldwyn. Another 105,000 square feet was added to the south and west sides of the building to enhance distribution, fabric cutting and store fixture construction.

“We’ve always operated in a facility that really wasn’t designed for what we do,” said Kirk. “The more we grew, the faster the pace, the more we realized we were never going to get better and certainly couldn’t accommodate any store growth unless we made a change. Admittedly, the costs and the disruptions of relocating our distribution operation to the new facility have been higher than we expected, with sales, gross margins and expenses being affected to varying extents. It’s been a challenging first half trying to complete this transition, but we can see the light at the end of the tunnel.”

Shipping from the new site began April 1.

“That’s when we began shipping to stores on a weekly basis instead of a biweekly basis for the first time,” said Kirk. “It gave us opportunity to be in a better in-stock position, carry less inventory for stores, and choose the appropriate freight channel. In some cases, a supplier or vendor had been shipping directly to all our stores, generally by parcel, which is the most expensive delivery method. The new distribution center allows us to cross-dock, where they package, label and drop it in bulk on our dock. Then we put it into our distribution system, which is a per-mile carrier. It’s a less expensive and more effective delivery method.”

For seasonal reasons, the third quarter will also be difficult, warned Kirk.

“Unlike the last half of the year, when we typically have multiple leader items or groups at higher price points and longer gross margins, the summer quarter is predominately a clearance time of year,” he explained.

During the first quarter, Hancock opened three stores and closed six. In the second quarter, Hancock Fabrics plans to open a dozen stores and close about 10. By the end of the fiscal year, the company plans to have net additions of 10 or more.

Second only to Jo-Ann Stores, Hancock Fabrics, established in 1957, is the nation’s No. 2 fabric chain. Kirk joined the company in 1971, and Lucky Stores purchased Hancock Fabrics in 1972. After operating the company as a wholly owned subsidiary, Lucky Stores spun off Hancock Fabrics as a public company in 1987 during an intense industry consolidation period.

Hancock Fabrics has successfully focused on expanding its selection of home decorating products, including drapery and upholstery fabric and home accent pieces. The company operates 430 retail fabric stores in 42 states, supplies more than 100 independent retailers in areas with no retail presence, and operates an Internet store. Approximately 6,500 people work for the company.

Moving ahead with plans

“We are pressing ahead with the installation of our point-of-sale (POS) system, which was operating in 224 stores at quarter-end,” said Kirk. “We are also involved in a comprehensive market study in the first and second quarters that will help us target new customers and high potential areas for store growth.”

Earlier this year, Hancock Fabrics announced its partnership with Laurie Smith, one of the stars of The Learning Channel’s hit home decorating show, “Trading Spaces,” to create a new product line, expected in stores nationwide in early 2005.

Because of costs associated with installing the POS system in retail stores, updating a networking system linking stores, opening and closing retail outlets and the construction and equipment required for the expanded distribution center and new company headquarters, capital expenditures totaled almost $22 million last year and will probably reach $25 million this year, said Kirk.

“After this year, our capital expenditures should drop back down to the $8- million to $10-million level, which is normal,” he said.

Contact MBJ contributing writer Lynne W. Jeter at mbj@thewritingdesk.com.


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