Tupelo's Hancock Fabrics rolls out impressive stats

TUPELO - While many companies are downsizing and struggling with an evershrinking bottom line, Tupelo-based Hancock Fabrics Inc. (NYSE:HKF), seller of fabrics, crafts and sewing accessories nationwide, continues to zip along. The company, which has found success, with its expansion into home decorating

In FY2001, Hancock Fabrics increased its net earnings from $6.8 million to $10.9 million even though sales increased a scant 1% from $381.6 million to $385.2 million. (In FY1998, sales reached a high of $392.3 million. Net income in FY1997 topped $15 million.)

Aided by the company's continuing stock repurchase program, earnings on a per share basis increased 40% in the fourth quarter and 70% for the entire year. Its workforce of 6,500 employees remained steady.

"Gross margins were very strong all year," said Larry G. Kirk, chairman and CEO of Hancock Fabrics, the nation's second-largest fabric chain. "With the general economic slowdown in the last six months and unusually deep discounting in fabric retailing, we chose to promote the value in our products and not to sacrifice pricing in what we believed, in the prevailing environment, would be an unproductive attempt to buy sales."

Hancock's top competitors include Jo-Ann Stores, Wal-Mart and Hobby Lobby. Established in 1957, Hancock Fabrics operates 440 stores in 42 states and supplies more than 100 independent wholesalers. During its history, the company has never reported an unprofitable year, Kirk said.

"Last year, gross profit benefited from new product additions, ongoing reallocation of our merchandise mix and continued close attention to routine obsolescence." Kirk said. "In fact, comparable store inventories were again lower than the prior year. Expense percentages were also reasonably well controlled, particularly considering the broad-based wage pressure during the year and the modest amount of sales leverage that was achieved."

During 2000, Hancock Fabrics' operating cash flow was sufficient to reduce debt by $15 million, repurchase treasury stock totaling $5.5 million, make capital expenditures of $4 million to upgrade the company's store base and pay cash dividends of $1.8 million. Since 1989, when the company's stock. repurchase plan began, 41% of its stock has been repurchased, with 20% repurchased in the last four years, Kirk said.

"Part of our success has been the ability to change with trends," said Kirk. "And fortunately, we seem cushioned with economic times. In down times, people sew for economic reasons. Or they redecorate their existing homes instead of 'stepping up' to larger ones. In prosperous times, we do well in our home decorating centers with new construction."

Several years ago, home-decorating products accounted for only 8% of the mix. Now, they account for roughly 23% and will soon make up 40% of Hancock's business, even though apparel sewing will remain the backbone of the fabric firm's business.

"As opposed to many years ago, when apparel was a central part of what we did, the business has changed as imports have gotten cheaper and imported ready-made clothing has gotten cheaper, and over time, the quality of those imports has gotten better," he said. "Because of that, the economic advantage of home sewing is not as compelling as it used to be. It's not the growth category that it once was even though there's still some growth, and I think we'll benefit from consolidation in the industry."

High growth categories - decorating, quilting and special occasion fabrics - represent substantial opportunities, Kirk said.

"We've aligned ourselves with Waverly, rolled out with sharp prices, and hopefully made a statement that we're definitely in the decorating business," Kirk said. "Quilting and special occasions - bridal, party and prom - are not nearly as price sensitive as other categories. You're certainly not going to shortcut your daughter's wedding. And people who quilt have so much time invested that they're not going to shortcut on quality either. So it's a question of reallocating those investments to higher growth categories and taking advantage of those trends. Which we can do because we've been in the business so long."

As a test to the home decor-only concept, the company's 30,000square-foot flagship store in Tupelo, located a mile from corporate headquarters, includes a Waverly Showcase, a special section featuring fabrics, bedding, pillows and other items and a specialty sewing service. The concept was designed to attract new, younger customers into the store and to entice those new customers into the apparel side of home sewing.

"We now have the Waverly concept plans in about 80 stores," Kirk said. "Our goal is to eventually have it in all of them, but not all the stores are necessarily suited for it. Some existing stores will be replaced by larger stores or stores in different locations."

In April, Hancock Fabrics added Waverly Showcase to its Internet store to sell Waverly fabric, bedding materials, pillows and other related items. The Waverly Showcase also includes the Lauren Hancock Collection, a premium branded line of fabric and pillows designed by Waverly and Hancock, exclusively for Hancock Fabrics.

"The addition of quality products by Waverly to our Internet store is a natural progression that parallels our efforts to include the Waverly Showcase as a separate department in our physical stores," Kirk said. "Alliances with suppliers, such as Waverly, that are mutually beneficial for both parties, can help to improve the product offerings and the value that we provide to our customers, whether in our stores or on the Internet."

Hancock Fabrics operates three Internet stores under its domain names, www.hancockfabrics.com and www.homedecoratingaccents.com. The Waverly Store, a third Internet site that came online "a few weeks ago, is accessible from Hancock Fabrics Web site.

"Internet sales are insignificant right now," Kirk said. "We started with the idea that the Internet was not necessarily about e-commerce. Instead, we focused on marketing, consumer information and vendor interaction and advanced in those areas."

To Kirk's surprise, Internet sales have increased at a rate of about 200% a week, he said.

"When the stores were opened on the Internet, we never thought it would take the place of the in-store shopping experience, where customers can touch and feel the fabric. But we knew there were customers that did not have a store in their area and we thought people might want to purchase a basic item or two," Kirk said. "It's surprising how much merchandise across the board we sell on the Internet. Our numbers are up exponentially week after week. Right now, the Internet store probably does as much business as a conventional store."

The slowing economy hasn't hampered Hancock's sales. In fact, industry trends show that sewing machine sales were up 50% last year and are already up 150% for the-first quarter over the same period last year.

"The rise in sewing machine sales is really intriguing because we don't really know why," Kirk said. "However, increased sewing machine sales don't immediately translate into fabric sales. But anytime you get a new machine into an existing customer's hands or to a new sewing enthusiast's hands, it's good. If you can sell them that machine inside your store where they are exposed to all the other products, then you're one step ahead."