HED: Hancock Fabrics seeks options to financial woes

LEAD-IN: The retailer prepares to close more stores and defaults on a $110 million credit line.

By Carlie Kollath

Daily Journal

BALDWYN - Financially troubled Hancock Fabrics said Tuesday it is "exploring strategic alternatives," a term analysts take to mean anything from a merger to a buyout to a bankruptcy filing.

A company spokesman said he could not specify what options the craft and fabric retailer is considering but said there are "a lot of issues to work out." The company said it was moving along as quickly as possible to find a solution that would "maximize the value for its stakeholders."

Last week, Hancock's board of directors met, perhaps to talk about the company's next moves. The spokesman declined to give details on the meeting.

Also on Tuesday, Hancock said it will close another 104 stores in 40 states, representing about $75 million in annual sales. The company said it doesn't know how much it will cost to shutter the locations, but in a statement said "there will likely be losses incurred" as they are liquidated. It's not known if Northeast Mississippi stores are on the chopping block.

The closings are in addition to the 30 closings announced Feb. 8, when the company operated 403 stores. A Hancock spokesman said the stores will be identified next week and will close in the next three to four months.

Last year, the company closed 42 stores.

"We regret the impact that this decision to close stores has on our associates, but we believe it is necessary in order to focus our attention and resources entirely on further improving our stores that are performing well," said Jane Aggers, president and CEO, in a statement.

Credit line default

Adding to its troubles, Hancock said Tuesday it defaulted on its $110 million credit line with Wachovia Bank. Hancock attributed the default in part to its delay in filing its quarterly financial statements for 2006, some of which are still outstanding nearly 10 months later.

Also, Hancock said it defaulted because it wasn't able to keep at least $25 million in excess availability of its credit line, a significant part of Hancock's agreement with Wachovia.

According to Hancock, Wachovia intends to increase the interest rate on about $59 million of borrowings and $11.5 million of letters of credit to the default rates, which are two percentage points higher than normal.

And, Wachovia said it may ask the banks that accept deposits from Hancock to transfer all cash deposits from the company to Wachovia instead, to pay down its credit line borrowings.

Shares of Hancock Fabricks (NYSE: HKF) Tuesday dropped 60 cents, or more than 35 percent, to $1.10. However, earlier in the day, the price had dipped down to $1.03. Closing stock prices over the past 52 weeks have ranged from a high of $4.36 to a low of $1.20. Nearly 1.8 million shares were traded Tuesday, nearly six times the average activity of its shares in the past three months.

Some of the activity might have been spurred with the news that Joseph L. Harrosh of Fremont, Calif., on Monday filed paperwork with the U.S. Securities and Exchange Commission that he has bought 1,643,600 shares, a little more than 8.5 percent of the company's shares. Harrosh is known in the investing world to buy out companies for a low price right before they file for bankruptcy protection.

At this point, it is unclear what will happen to shareholders' stock holdings if Hancock Fabrics were to file for bankruptcy protection or if it were to be bought out by another company.

Contact Daily Journal business reporter Carlie Kollath at 678-1598 or carlie.kollath@djournal.com.

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