February 28, 2005
Wish List Watch – Hancock Fabrics

“Although the company risks reducing its dividend in the near-term, a strong payout is likely to be sustained in the long-term.” 2005 Wish List

Hancock reported disappointing 2004 financial results last week, and although the company is planning to cut capital expenditures to $10 million in 2005 – down from more than $20 million in 2004 and 2003 – the slump in same store sales (-4.7% in 4Q04) does not bode well for the dividend going forward. Quite frankly, when the board meets in March there is a strong possibility that they will vote to reduce Hancock’s dividend payout.


Hancock’s stock price may react negatively to a dividend reduction.  However, with the current dividend yield on the stock an extremely attractive 5.49%, a small or medium sized dividend reduction – perhaps in the $3-$4 million range – may not be dire news: a $3-$4 million annual dividend reduction would translate into a 3.1%-3.8% dividend yield (at $8.75/share). 

There is the possibility that the board will vote to sustain the current dividend payout (although it is difficult to build a case for why the div should be sustained in the face of poor financial results).  Contrarily, there is the remote possibility that the company will cut the dividend altogether and focus on turning operations around and/or reducing debt with all available cash. Suffice to say, the upcoming dividend announcement is highly anticipated.  Our speculation is that a small dividend reduction will come to pass, and that HKF shares will drift lower if the sales trend does not show improvement in the near-term. 

Dividend consideration aside, during the company’s conference call new CEO, Jane Aggers, said that despite an improvement over January, same store sales trends remained ‘difficult’ in February. Ms. Aggers also noted that she has not mapped out any firm plans for a turnaround, except to say that Hancock will do what its customers tell them to do.  The theme to taken from the conference call is that Hancock’s turnaround will take time: short-term minded investors need not apply.

On the positive side of things, Hancock said that “customer traffic did not vary significantly between years (04 vs. 03)”, the company is finally done informing investors about POS/new distribution center costs, and a new line – Laurie Smith – is readying to launch.  In short, while the immediate future for Hancock is far from bright, some storm clouds could be lifting.

Hancock Fabrics remains on the Wish List.  We continue to regard Hancock as a turnaround investment supported by an attractive dividend yield. 


BWilett@fallstreet.com

TAlway@fallstreet.com