top of page

Hancock Fabrics

Recognition

2009

Retail Manufacturing/Distribution & Goods/Services Middle Market Financing of the Year

2009

Retail Products and Services Turnaround of the Year



Background

Hancock Fabrics, Inc. ("the Company") operated as a specialty fabric retailer of fashion and home decorating textiles, quilting materials, sewing accessories, needlecraft supplies, and sewing machines.  It was then one of the largest fabric retail chains in the United States, with approximately 270 stores in 37 states.​ Hancock Fabrics filed for Chapter 11 protection on March 21, 2007, and became the first retailer to exit under the new, modified, bankruptcy code​.


SOURCES OF DISTRESS

  • Due to a disagreement with its new audit partner over the proper way to count its inventory, the Company had not been able to make its required SEC filings for over two years.​

  • Each of the Company’s 450 stores were run largely by the local store manager with little input or effective oversight from corporate headquarters. Despite requests from both the Board and the new CEO, the Company had never prepared any 4-wall analyses. Moreover, cash and inventory management systems were primitive or non-existent.​

  • Despite spending significant millions in the preceding six years, the Company had never completed the installation of new JDA ERP software. As a result, the only relatively reliable and timely financial information that could be produced was POS sales and generic SKU margin information.

  • Facing significant resistance from a well-entrenched and well-paid local management team and workforce, the relatively new, outside CEO was having great difficulty in her efforts to transform the company from a ’50s-era wholesaler to a modern specialty retailer.​

  • While the Company was dark, its negative EBIDTA ballooned from -$5 million to a negative run rate of $45 million. 

  • This in turn caused the Company’s lenders to demand repayment either through a refinancing, sale, or some other strategic alternative.​



Results

Listed below are a few of the areas where Charlie assisted Hancock Fabrics in achieving important results:

4-Wall Analyses and Business Plan Assessment

Immediately following his retention, utilizing current POS sales data, historical margins, and two-year old store-level operating expenses, Charlie and his team at Houlihan Lokey created Hancock Fabrics’ first comprehensive monthly 4-wall analysis, allowing management to analyze store-level profitability, sales trends, lease costs and estimated rejection claims for each of the store locations.​

The 4-wall analysis produced the foundation for the 5-year business plan, the outline for which Charlie substantially completed within 120 days after retention.  Thereafter, he assisted management and CRG (the company’s operational advisor) on a post-petition basis to flesh-out and implement the plan to return the company to profitability.​

By the time of exit, growth in comparable store sales had considerably increased in the stores that the company kept open.

Retention of Key Professionals​​

Charlie also assisted in the hiring of CRG professionals: COO Jeff Nerland as the interim CFO of the company, Keen Consultants as marketer of leases on closed locations, and Great American as liquidation manager for the Going-Out-Of-Business (“GOB”) sales.

Resolution of Potential PBGC and OPEB Issues​

Charlie helped the company successfully avoid termination of the plan by the PBGC and develop a strategy to substantially mitigate OPEB liabilities on an ongoing basis.​

Rationalized Store Base, Lease Renegotiations, and Successful Liquidation Sales

Charlie worked with the company, its counsel Robert Dehney of Morris Nichols, and CRG to: (i) develop and implement a strategy for closing unprofitable and non-strategic stores, (ii) assist in soliciting and evaluating bids for firms to run store liquidations, and (iii) conduct GOB sales at the 134 stores slated for immediate closure post-petition.​

He worked with Morris Nichols, CRG, and Keen to develop and implement strategies to sell leases on closed stores, extend the statutory periods to accept or reject leases, and mitigate lease damage claims on closed stores. ​

Following successful negotiations, the company sold a large number of leases, while rejecting leases for many retail locations.  ​

The GOB sales achieved realization rates of 80% of inventory replacement cost.​​

Operational Turnaround​

Charlie assisted management and CRG in identifying other areas of potential cost reductions, and in implementing plans to achieve cost savings.  Actions ultimately included headcount reductions, centralization of merchandising, marketing, and purchasing, and increased efficiencies from technology upgrades and new platforms.​

Charlie and his team also assisted in the development and utilization of integrated financial and operating reports to allow real-time assessment and management of the business.  

Sale Process and Exit Financing​

Charlie’s team secured $120 million in exit financings, comprised of a $100 million revolving credit facility provided by G.E. Capital and $20 million in second lien secured notes provided by existing equity investors in a fully-backstopped rights offering.​​

DIP Financing​

Charlie’s team arranged $122.5 million in senior and junior DIP financing from Wachovia and Cerberus at rates of L+175 and L+500, respectively. 

The interest and advance rates on the senior DIP were very similar to the non-default rates of the company’s pre-petition loan with Wachovia, and substantially better than the rates initially proposed by Wachovia as agent for the pre-petition senior lenders. Over the course of the engagement, the company's performance improved significantly, from a run rate of -$15 million to an approximate run rate of +$9 million 18 months later.​

The Bottom Line​

The plan was confirmed without the vote of any class of holders based on the court’s finding that no holder of any claim was impaired.​​

The company saw its -$45 million EBITDA improve to a positive 9% EBITDAR within 18 months of the implementation of the plan.​

Creditors were paid in full, with interest, in cash on the effective date.  Pre-petition equity holders retained their interests with stock trading at $1.84 per share on the effective date, up from $0.61 per share during the case.



We're here to help! Feel free to reach out:

Asgaard is a division of Asgaard Capital LLC

1934 Old Gallows Road, Suite 350

Tysons Corner, VA 22182

bottom of page