|
Hancock Fabrics
Hancock Fabrics reported poor financial results last week and new CEO, Jane Aggers, gave little indication that business performance is about to improve. The deterioration in the company’s financial performance raises the odds of another dividend reduction. In fact, there is the real possibility that Hancock will cut its dividend altogether when the board meets in June.
Before 2005 began Hancock was a company that had a history of generating free cash, paying an attractive dividend, and maintaining a healthy balance sheet (on an annual basis). Moreover, the company had three related positives going for it:
1) New point-of-sale systems and new distribution plant.
2) Expectation that capital expenditures would decline from more than $20 million in 2004 and 2003 to $10 million in 2005.
3) Old distribution plant for sale and expected to fetch $3+ million.
As it would turn out, new efficiencies from investments made in 2003 and 2004 have not had a major impact on operations, the old distribution center is still up for sale, and the capital expenditure outlook has quickly been rendered irrelevant as the company deals with losses. As for the dividend, free cash, and balance sheet outlook; after a terrible start to the new year each is now in doubt going forward.
In hindsight, it can be said that Todd and I placed to much focus on the historical financial statistics and not enough on the 2004 sales trend when we selected and purchased Hancock shares. Of equal or greater concern is the fact that we may have selected Hancock partly because of our eagerness to put some capital to work in the market and/or our eagerness to own a company with a history of positive fourth quarter surprises.
Whatever the case may be, our original platform for purchasing HKF has collapsed, and we have only ourselves to blame. Uncertainty surrounding the company’s fourth quarter results - which historically tend to make or break Hancock’s year - should have gave us greater pause.
We are not giving up on Hancock. Rather, and forgetting about the unpredictable dividend going forward, we see the company as a speculative turnaround investment today. We believe at its current stock price, which is just above tangible book, that HKF shares are pricing in little more than corporate survival. We believe that the 48-year old Hancock will remain a going concern.
We note the word ‘speculative’ because the company faces challenges not only from the weak category trend, but also from seasonal forces in the near term. Quite frankly, that Hancock is trying to turn things around in what is historically its worst (revenues) quarter does not give us great confidence that strides towards profitability will be made in the next few months. The company is retooling stores, trying a new ad campaign, and - like many retailers - preparing for what is a make or break second half to the year.
 |
Two Canadian Holdings
Caldwell is performing well and should continue funding its dividend. We may remove Caldwell from the Wish List if business conditions show sign of slowing down and/or Caldwell shares trade above $2/share. There is currently – judging from our regular visits to Caldwell’s job search engine and recent trends in the Canadian jobs market – no signs of a slow down. Caldwell has gone from being a long-term book value investment in 2001 to a stable dividend investment today.
High Liner ‘s increased reliance on US club store sales has, as expected, provided some volatility to the company’s quarter-to-quarter US financial performance. Added to this volatility is the fact that the Fisher Boy brand is performing poorly. In short, the US side of the business is performing poorly while the Canadian side of High Liner equation remains strong. Regardless of stock price movements, we have no plans to remove High Liner from the Wish List. Currency issues play an important role in High Liner’s near term performance (CND$ vs. US$ and the potential revaluation of the Yuan). We have no opinion on currency issues.
BWilett@fallstreet.com
TAlway@fallstreet.com
|
|
