Hancock Fabrics, Inc. Business Information, Profile, and History

Company Perspectives:

When Hancock Fabrics was founded in 1957, it marked the introduction of a significant new concept in fabric retailing. With a seemingly endless selection of specialized merchandise displayed in a large-store format, Hancock's supermarket of fabrics and related accessories represented the first real commitment by a retailer to concentrate on one thing and to do it better than anyone else. ... Despite the staggering pace of change in today's business environment, the fabric customer continues to be the ultimate reason for everything we do. In that spirit, the people of Hancock Fabrics remain committed to keeping our costs and therefore our prices low as we search the markets of the world for the merchandise values that our customers expect and deserve. You see, even after almost forty years, our mission is still the same&mdashø earn the right to be "America's Fabric Store."

History of Hancock Fabrics, Inc.

Hancock Fabrics, Inc. is one of the leading fabric chains serving the home sewing market. Known as "America's fabric store," the company retails and wholesales fabric, crafts, and other home sewing accessories in 33 states under the trade names of Hancock Fabrics, Minnesota Fabrics, Fabric Warehouse, and Fabric Market.

The Complete Fabric Store

Founded in 1957, Hancock Fabrics developed the concept of a total fabric retailer. More than just a specialty shop, the first stores opened by Hancock Fabrics were cost-efficient and offered a greater selection of merchandise to consumers at lower prices. "Long before the 'category killer' catchword was coined and applied to the specialty businesses of toys, office supplies, building materials, and others," the company revealed in an annual report, "Hancock Fabrics pioneered the concept of a complete fabric store. As opposed to the high cost and limited selection of a mall location or small specialty shop, Hancock pursued a powerful, cost-efficient store format that permitted consistently lower prices and a greater selection of merchandise for our customer." The Tupelo-based company perfected its approach to fabric retailing as years went by, expanding to communities across the United States.

The mid-1970s brought crisis to fabric retailers nationwide when market forces pushed many operators out of business. The excess expansion of previous years, plus inefficient operations and undercapitalization, caused the demise of more than one shop and chain. Hancock Fabrics, however, weathered all this well. Although impacted by excess expansion and the ensuing correction process, Hancock Fabrics nevertheless had earned profits every quarter for 30 consecutive years since the early 1970s.

The next 15 years brought strong sales growth and earning gains for Hancock. Sales in 1985, for example, totaled $281.6 million, with $18.6 million in net earnings. By 1988, sales rose to $315.4 million, and net earnings grew to $22.0 million. Hancock continued opening more new and larger stores and upsizing existing smaller stores throughout the 1980s. The retailer employed 5,265 people in 320 stores during 1985, expanding to 366 stores with 6,051 employees in 1988.

By 1992, Hancock Fabrics was one of seven major retail piece-goods chains, with 482 stores, accounting for approximately 24 percent of the 2,000 full-sized fabric stores in the United States. During this year of peak capacity for the fabric industry, Hancock's sales reached $380.4 million, and net earnings rose to $12.1 million. Employees numbered 7,390.

Industry Reformation in the 1990s

The early 1990s again brought a slowing economy that greatly affected fabric retailers. As Bob Yarbrough explained in the Mississippi Business Journal, "The rugged economy ... [had] taken the steam out of what was thought to be a recession-proof industry." Consumers at this time became cautious buyers, creating a general weakness in both piece-goods and ready-to-wear fashion apparel sales. Store growth throughout the industry exceeded the demands of consumers, so retailers responded with aggressive price promotions that often sacrificed margins. Price discounting was widespread, and market share came second after the conversion of swelling inventories to cash as debt levels grew.

Hancock saw its stock drop from $24 in 1991 to $10 in 1992. The stocks of Hancock's competitors, Fabri-Centers of America and House of Fabrics, could not escape the soft economy, either. Fabri-Centers of America, for example, lost nine points in one week during the recession.

Although Hancock was the first stock to reflect the recession, industry analysts remained optimistic about its future. When competitors were first moving from smaller stores to bigger ones, Hancock already was operating larger stores. As Larry Kirk, then Hancock's chief financial officer, explained in the Mississippi Business Journal, "We've always operated larger stores, and the others are still making the move from smaller, mall-sized stores to superstores. We have more history with our stores, and changes in sales will show up faster."

Hancock also was the industry's pricing leader. Known for high quality management, Hancock faced the recession with a conservative balance sheet and strong cash flow. At the time, an industry report prepared by Stephens Inc., analysts of the retail fabric industry, noted, "Despite Hancock's recent setbacks, we remain confident in management's ability to successfully execute its long-range growth strategy. We especially like the company's philosophy of running the business for the long haul."

Nevertheless, by 1993, the entire retail fabric industry struggled to survive. The three largest retail fabric chains filed for bankruptcy; many smaller chains and independent shops closed. Hancock's net income more than halved from 1991 to 1992, dropping from $23.0 million to $12.1 million. Net income was down to $5.4 million by 1993. Hancock's earnings per share (before the cumulative effect of changes in accounting methods) also fell, from $1.03 in 1991 to $0.57 in 1992. By 1993 earnings decreased to $0.26 per share.

From 1992 through 1994, Hancock also endured a decrease in sales. Sales in 1992 totaled $380.4 million; they dropped to $367.7 million in 1993 and $366.8 million in 1994. In addition, expenses as a percentage of those lower sales increased. Average stock prices also decreased, from $13.57 in 1992 to $11.00 in 1993 to $8.38 in 1994. Gross margins fell as well. In 1992 Hancock Fabrics reported a gross margin of $173.0 million, a decrease of $11 million from the preceding year. This dipped again to $161.5 million for 1993. Though its debt level was somewhat higher than in the past, Hancock nevertheless remained in sound financial condition and earned profits each quarter.

Those companies remaining in operation in 1993 initiated a correction process. These retailers, including Hancock Fabrics, greatly reduced their store concentrations and prepared for changes in the competitive structure of the industry. They closed stores, reduced square footage, and liquidated inventories. Retailers adopted different strategies that affected all areas: product mix, marketing, expansion, even financial risk.

Hancock Responds to Change

Hancock's response to industry changes were calculated and effective. The company worked to improve the efficiency of its merchandise mix by adding complementary products to its stores and by discontinuing unproductive items. The retailer downplayed fashion apparel in favor of more popular merchandise categories such as home decorations, quilting, specialty fabrics, and seasonal goods.

Hancock began to promote its stores as complete fabric retailers with the largest selections of merchandise at the best prices and with the best service. Other marketing efforts emphasized the pleasures of sewing, quilting, and home decorating.

To reach new customers and excite existing ones, in 1995 Hancock Fabrics developed a half-hour sewing show, "Sew Perfect," for the Home & Garden Television Network (HGTV). A charter advertising partnership with the network allowed Hancock to maintain a consistent advertising presence on the network throughout the broadcast schedule. For more print-oriented consumers, Hancock introduced a sewing and decorating magazine. The first issue of Home Expressions debuted in October that same year.

Hancock also co-branded a MasterCard, the "Fabric Card," in 1995. The card offered a low interest rate, as well as rebates on purchases and special monthly incentives such as coupons and discounts for use at Hancock stores.

Moreover, the company reevaluated its place in the fabric industry. In the 1995 annual report, Hancock Fabrics revealed to its shareholders: "Perhaps the most fundamental action that resulted from the challenges of the last few years was the company's renewed commitment to its roots. While many of our competitors were dividing their resources and attention among a variety of ventures, Hancock intensified its focus on the business of fabric retailing. Believing that better opportunities were available in a business that was approaching competitive balance than in segments where competition was destined to become increasingly intense, the company determined to improve and expand its operations in the business that we understand best." So, in addition to its marketing efforts, Hancock revised its operational strategies to improve the company's performance. Hancock closed 22 underperforming stores and opened 20 new ones in 1995. The company even discussed (but abandoned) the acquisition of its competitor House of Fabrics that year. At the end of 1995, the company was in the best financial condition in seven years, and operational and financial performances continued to improve. "Our concentrated effort to stock the right goods in the correct allocations at the optimum time is resulting in improved sales, better inventory productivity, and reduced markdowns," explained Chief Executive Officer Larry G. Kirk in 1996.

The Future

Although most of the changes caused by excess capacity are believed to be in the past for fabric retailers, the industry still must contend with the effects of expansion in the future. According to the company's 1995 annual report, "In the coming quarters, Hancock too will participate in the industry's purging of unproductive stores and the reallocation of inventory. Excluding acquisition possibilities, we expect to close more stores than we open. ... However, in doing so, we will increase the productivity of our assets and improve returns to our shareholders."

The prolonged weakness in the demand for apparel goods was expected to remain as well. The pressure on retailers no doubt will continue as the relationship between their supplies and consumer demands is restored. As in the 1970s, some retailers will disappear; some will consolidate and combine, and others, like Hancock, will survive by virtue of their financial soundness and stability. In fact, the company anticipates strong growth in sales and in earnings in the years ahead. As Kirk explained in a November 1996 press release, "Fabric retailing is heading into another phase of the shakeout and consolidation that has been under way for the last three years. The restoration of competitive balance and the recovery in apparel demand are providing greater opportunities for stable, well capitalized operators. We will continue to make revenue growth a major priority emphasizing new concepts and products, natural expansion into underserved markets, and strategic acquisitions that would be additive to earnings. We are off to a good start ..., and we look forward to a strong finish."