UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549





FORM
10-Q





x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the quarterly period ended   May 2, 2009





OR





 ̈
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE


SECURITIES
EXCHANGE ACT OF 1934





For
the transition period from_____________to___________.





Commission
File Number 1 – 9482





HANCOCK
FABRICS, INC.


(Exact
name of registrant as specified in its charter)





Delaware
              64-0740905(State
      or other jurisdiction
              (I.R.S.
      Employerof
      incorporation or organization)
              Identification
      No.)One
      Fashion Way, Baldwyn, MS
              38824(Address
      of principal executive offices)
              (Zip
      Code)





(662)
365-6000


Registrant’s
telephone number, including area code





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90
days.            Yes
x
    No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232. .405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).                                  Yes
 ̈
    No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.







Large Accelerated
      Filer       ̈
            Accelerated
      Filer     ̈
            Non-Accelerated
      Filer    ̈
            Smaller Reporting
      Company   x




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange
Act).          Yes  ̈
    No x





APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY


PROCEEDINGS
DURING THE PRECEDING FIVE YEARS:





Indicate
by check mark whether the registrant has filed all documents and reports
required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act
of 1934 subsequent to the distribution of securities under a plan confirmed by a
court.        Yes x
    No  ̈





As of May
30, 2009, there were 19,700,803, shares of Hancock Fabrics, Inc. $.01 par value
common stock outstanding.





INDEX





PagePart
      I.  Financial Information:Item
      1.  Financial StatementsConsolidated
      Balance Sheets as of May 2, 2009, May 3, 2008 and January 31,
      2009
                            
                            
                            3Consolidated
      Statements of Operations for the Thirteen Weeks Ended May 2, 2009 and May
      3, 2008
                            
                            
                            4Consolidated
      Statement of Shareholders’ Equity for the Thirteen Weeks Ended May 2,
      2009
                            
                            
                            5Consolidated
      Statements of Cash Flows for the Thirteen Weeks Ended May 2, 2009 and May
      3, 2008
                            
                            
                            6Notes
      to Consolidated Financial Statements
                            
                            
                            7Item
      2.  Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                            
                            
                            11Item
      3.  Quantitative and Qualitative Disclosures about Market
      Risks
                            
                            
                            19Item
      4T.  Controls and Procedures
                            
                            
                            20Part
      II.  Other Information:Item
      1. Legal Proceedings
                            
                            
                            20Item
      1A. Risk Factors
                            
                            
                            20Item
      2. Unregistered Sales of Equity Securities and Use of
    Proceeds
                            
                            
                            21Item
      3. Defaults Upon Senior Securities
                            
                            
                            21Item
      4. Submission of Matters to a Vote of Security Holders
                            
                            
                            21Item
      5. Other Information
                            
                            
                            21Item
      6.  Exhibits
                            
                            
                            21Signatures
                            
                            
                            22Exhibit
      31.1  Certification of Chief Executive OfficerExhibit
      31.2  Certification of Chief Financial OfficerExhibit
      32  Certification of Chief Executive Officer and Chief Financial
      Officer Pursuant to 18 U.S.C. Section 1350




2




PART
I. FINANCIAL INFORMATION
  ITEM
1. FINANCIAL STATEMENTS
  HANCOCK
FABRICS, INC.
 CONSOLIDATED
BALANCE SHEETS
 
 (unaudited)May
      2,
                                                                                
                                                                                
                                                                                May
      3,
                                                                                
                                                                                
                                                                                January
      31,(in
      thousands, except for share amounts)
                                                                                
                                                                                2009
                                                                                
                                                                                
                                                                                2008
                                                                                
                                                                                
                                                                                2009
      (1)AssetsCurrent
      assets:Cash
      and cash equivalents
                                                                                
                                                                                $
                                                                                2,242
                                                                                
                                                                                
                                                                                $
                                                                                2,705
                                                                                
                                                                                
                                                                                $
                                                                                2,338Receivables,
      less allowance for doubtful accounts
                                                                                
                                                                                
                                                                                2,968
                                                                                
                                                                                
                                                                                
                                                                                4,037
                                                                                
                                                                                
                                                                                
                                                                                3,380Inventories
                                                                                
                                                                                
                                                                                100,582
                                                                                
                                                                                
                                                                                
                                                                                118,299
                                                                                
                                                                                
                                                                                
                                                                                104,156Income
      taxes refundable
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                8,118
                                                                                
                                                                                
                                                                                
                                                                                -Prepaid
      expenses
                                                                                
                                                                                
                                                                                1,341
                                                                                
                                                                                
                                                                                
                                                                                1,058
                                                                                
                                                                                
                                                                                
                                                                                1,735Total
      current assets
                                                                                
                                                                                
                                                                                107,133
                                                                                
                                                                                
                                                                                
                                                                                134,217
                                                                                
                                                                                
                                                                                
                                                                                111,609Property
      and equipment, net
                                                                                
                                                                                
                                                                                44,063
                                                                                
                                                                                
                                                                                
                                                                                44,531
                                                                                
                                                                                
                                                                                
                                                                                45,039Goodwill
                                                                                
                                                                                
                                                                                3,210
                                                                                
                                                                                
                                                                                
                                                                                3,406
                                                                                
                                                                                
                                                                                
                                                                                3,210Other
      assets
                                                                                
                                                                                
                                                                                5,533
                                                                                
                                                                                
                                                                                
                                                                                7,653
                                                                                
                                                                                
                                                                                
                                                                                4,816Total
      assets
                                                                                
                                                                                $
                                                                                159,939
                                                                                
                                                                                
                                                                                $
                                                                                189,807
                                                                                
                                                                                
                                                                                $
                                                                                164,674Liabilities
      and Shareholders' EquityLiabilities
      not subject to compromise:Current
      liabilities:Accounts
      payable
                                                                                
                                                                                $
                                                                                18,680
                                                                                
                                                                                
                                                                                $
                                                                                17,906
                                                                                
                                                                                
                                                                                $
                                                                                21,437Accrued
      liabilities
                                                                                
                                                                                
                                                                                14,001
                                                                                
                                                                                
                                                                                
                                                                                13,996
                                                                                
                                                                                
                                                                                
                                                                                14,813Other
      pre-petition obligations
                                                                                
                                                                                
                                                                                1,842
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                2,796Total
      current liabilities
                                                                                
                                                                                
                                                                                34,523
                                                                                
                                                                                
                                                                                
                                                                                31,902
                                                                                
                                                                                
                                                                                
                                                                                39,046Long-term
      debt obligations
                                                                                
                                                                                
                                                                                43,088
                                                                                
                                                                                
                                                                                
                                                                                36,981
                                                                                
                                                                                
                                                                                
                                                                                42,977Capital
      lease obligations
                                                                                
                                                                                
                                                                                3,256
                                                                                
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                3,287Postretirement
      benefits other than pensions
                                                                                
                                                                                
                                                                                2,208
                                                                                
                                                                                
                                                                                
                                                                                384
                                                                                
                                                                                
                                                                                
                                                                                2,211Pension
      and SERP liabilities
                                                                                
                                                                                
                                                                                22,212
                                                                                
                                                                                
                                                                                
                                                                                396
                                                                                
                                                                                
                                                                                
                                                                                21,706Other
      liabilities
                                                                                
                                                                                
                                                                                7,979
                                                                                
                                                                                
                                                                                
                                                                                2,986
                                                                                
                                                                                
                                                                                
                                                                                8,098Total
      liabilities not subject to compromise
                                                                                
                                                                                
                                                                                113,266
                                                                                
                                                                                
                                                                                
                                                                                72,649
                                                                                
                                                                                
                                                                                
                                                                                117,325Liabilities
      subject to compromise
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                58,808
                                                                                
                                                                                
                                                                                
                                                                                -Total
      liabilities
                                                                                
                                                                                
                                                                                113,266
                                                                                
                                                                                
                                                                                
                                                                                131,457
                                                                                
                                                                                
                                                                                
                                                                                117,325Commitments
      and contingenciesShareholders'
      equity:Common
      stock, $.01 par value; 80,000,000 shares
      authorized; 33,064,070, 32,748,983 and 33,084,570 issued and
      19,695,803, 19,400,012 and 19,716,303 outstanding,
      respectively
                                                                                
                                                                                
                                                                                331
                                                                                
                                                                                
                                                                                
                                                                                327
                                                                                
                                                                                
                                                                                
                                                                                331Additional
      paid-in capital
                                                                                
                                                                                
                                                                                88,273
                                                                                
                                                                                
                                                                                
                                                                                75,770
                                                                                
                                                                                
                                                                                
                                                                                88,017Retained
      earnings
                                                                                
                                                                                
                                                                                124,025
                                                                                
                                                                                
                                                                                
                                                                                132,018
                                                                                
                                                                                
                                                                                
                                                                                124,907Treasury
      stock, at cost, 13,368,267, 13,348,971 13,368,267 shares
      held, respectively
                                                                                
                                                                                
                                                                                (153,684
                                                                                )
                                                                                
                                                                                
                                                                                (153,661
                                                                                )
                                                                                
                                                                                
                                                                                (153,684
                                                                                )Accumulated
      other comprehensive income (loss)
                                                                                
                                                                                
                                                                                (12,272
                                                                                )
                                                                                
                                                                                
                                                                                3,896
                                                                                
                                                                                
                                                                                
                                                                                (12,222
                                                                                )Total
      shareholders' equity
                                                                                
                                                                                
                                                                                46,673
                                                                                
                                                                                
                                                                                
                                                                                58,350
                                                                                
                                                                                
                                                                                
                                                                                47,349Total
      liabilities and shareholders' equity
                                                                                
                                                                                $
                                                                                159,939
                                                                                
                                                                                
                                                                                $
                                                                                189,807
                                                                                
                                                                                
                                                                                $
                                                                                164,674
 
 See
accompanying notes to consolidated financial statements.
  (1) From
audited balance sheet included in our annual report on Form 10-K for the fiscal
year January 31, 2009.
  3


HANCOCK
FABRICS, INC.
 CONSOLIDATED
STATEMENTS OF OPERATIONS
 (unaudited)
 
 (in
      thousands, except per share amounts)
                                                              
                                                              Thirteen
      Weeks
                                                                Ended
                                                                May
      2,
                                                                2009
                                                              
                                                              
                                                              Thirteen
      Weeks
                                                                Ended
                                                                May
      3,
                                                                2008Sales
                                                              
                                                              $
                                                              64,069
                                                              
                                                              
                                                              $
                                                              63,816Cost
      of goods sold
                                                              
                                                              
                                                              35,157
                                                              
                                                              
                                                              
                                                              35,247Gross
      profit
                                                              
                                                              
                                                              28,912
                                                              
                                                              
                                                              
                                                              28,569Selling,
      general and administrative expense
                                                              
                                                              
                                                              27,181
                                                              
                                                              
                                                              
                                                              29,750Depreciation
      and amortization
                                                              
                                                              
                                                              1,089
                                                              
                                                              
                                                              
                                                              1,013Operating
      income (loss)
                                                              
                                                              
                                                              642
                                                              
                                                              
                                                              
                                                              (2,194
                                                              )Reorganization
      expense, net
                                                              
                                                              
                                                              239
                                                              
                                                              
                                                              
                                                              2,676Interest
      expense, net
                                                              
                                                              
                                                              1,334
                                                              
                                                              
                                                              
                                                              989Loss
      from continuing operations before income taxes
                                                              
                                                              
                                                              (931
                                                              )
                                                              
                                                              
                                                              (5,859
                                                              )Income
      taxes
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Loss
      from continuing operations
                                                              
                                                              
                                                              (931
                                                              )
                                                              
                                                              
                                                              (5,859
                                                              )Earnings
      from discontinued operations (net of tax expense of $0 and
    $0)
                                                              
                                                              
                                                              49
                                                              
                                                              
                                                              
                                                              542Net
      loss
                                                              
                                                              $
                                                              (882
                                                              )
                                                              
                                                              $
                                                              (5,317
                                                              )Basic
      and diluted loss per share:Loss
      from continuing operations
                                                              
                                                              $
                                                              (0.05
                                                              )
                                                              
                                                              $
                                                              (0.31
                                                              )Earnings
      from discontinued operations
                                                              
                                                              
                                                              0.00
                                                              
                                                              
                                                              
                                                              0.03Net
      loss
                                                              
                                                              $
                                                              (0.05
                                                              )
                                                              
                                                              $
                                                              (0.28
                                                              )Weighted
      average shares outstanding:Basic
      and diluted
                                                              
                                                              
                                                              19,219
                                                              
                                                              
                                                              
                                                              18,984
 
 See
accompanying notes to consolidated financial
statements.


4


HANCOCK
FABRICS, INC.
 CONSOLIDATED
STATEMENT OF SHAREHOLDERS' EQUITY
 (unaudited)
  AccumulatedAdditional
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          Other
                                          
                                          
                                          TotalCommon
      Stock
                                          
                                          Paid-in
                                          
                                          Retained
                                          
                                          Treasury
      Stock
                                          
                                          
                                          Comprehensive
                                          
                                          
                                          Shareholders'(in thousands, except for number of shares)
                                          
                                          Shares
                                          
                                          Amount
                                          
                                          Capital
                                          
                                          Earnings
                                          
                                          Shares
                                          
                                          Amount
                                          
                                          
                                          Income
      (Loss)
                                          
                                          
                                          EquityBalance
      January 31, 2009
                                          
                                          
                                          33,084,570
                                          
                                          $
                                          331
                                          
                                          $
                                          88,017
                                          
                                          $
                                          124,907
                                          
                                          
                                          (13,368,267
                                          )
                                          $
                                          (153,684
                                          )
                                          
                                          $
                                          (12,222
                                          )
                                          
                                          $
                                          47,349Comprehensive
      loss:Net
      loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (882
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (882
                                          )Minimum
      pension, SERP and OPEB liabilities, net of taxes of $0
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (50
                                          )
                                          
                                          
                                          (50
                                          )Total
      comprehensive loss
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          (932
                                          )Cancellation
      of restricted stock
                                          
                                          
                                          (20,500
                                          )
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          -Stock
      compensation expense
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          204
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          204Amortization
      of directors' fees
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          52
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          
                                          52Balance
      May 2, 2009
                                          
                                          
                                          33,064,070
                                          
                                          $
                                          331
                                          
                                          $
                                          88,273
                                          
                                          $
                                          124,025
                                          
                                          
                                          (13,368,267
                                          )
                                          $
                                          (153,684
                                          )
                                          
                                          $
                                          (12,272
                                          )
                                          
                                          $
                                          46,673
 
 See
accompanying notes to consolidated financial
statements.


5


Hancock
Fabrics, Inc.
 Consolidated
Statements of Cash Flows
 (unaudited)
 
 Thirteen
      Weeks EndedMay
      2,
                                                    
                                                    
                                                    May
      3,(in
      thousands)
                                                    
                                                    2009
                                                    
                                                    
                                                    2008Cash
      flows from operating activities:Net
      loss
                                                    
                                                    $
                                                    (882
                                                    )
                                                    
                                                    $
                                                    (5,317
                                                    )Adjustments
      to reconcile net loss to cash flows from operating
    activitiesDepreciation
      and amortization, including cost of goods sold
                                                    
                                                    
                                                    1,583
                                                    
                                                    
                                                    
                                                    1,584Amortization
      of deferred loan costs
                                                    
                                                    
                                                    62
                                                    
                                                    
                                                    
                                                    156Amortization
      of bond discount
                                                    
                                                    
                                                    583
                                                    
                                                    
                                                    
                                                    -Interest
      paid-in-kind on notes
                                                    
                                                    
                                                    346
                                                    
                                                    
                                                    
                                                    -Stock
      compensation expense
                                                    
                                                    
                                                    256
                                                    
                                                    
                                                    
                                                    447Reserve
      for store closings credits, including interest expense
                                                    
                                                    
                                                    (87
                                                    )
                                                    
                                                    
                                                    (545
                                                    )Other
                                                    
                                                    
                                                    (63
                                                    )
                                                    
                                                    
                                                    (199
                                                    )Reorganization
      expense, net
                                                    
                                                    
                                                    239
                                                    
                                                    
                                                    
                                                    2,676(Increase)
      decrease in assetsReceivables
      and prepaid expenses
                                                    
                                                    
                                                    807
                                                    
                                                    
                                                    
                                                    1,106Inventory
      at current cost
                                                    
                                                    
                                                    3,619
                                                    
                                                    
                                                    
                                                    (4,163
                                                    )Other
      noncurrent assets
                                                    
                                                    
                                                    (780
                                                    )
                                                    
                                                    
                                                    (227
                                                    )Increase
      (decrease) in liabilitiesAccounts
      payable
                                                    
                                                    
                                                    (2,759
                                                    )
                                                    
                                                    
                                                    (2,538
                                                    )Accrued
      liabilities
                                                    
                                                    
                                                    (1,144
                                                    )
                                                    
                                                    
                                                    (333
                                                    )Postretirement
      benefits other than pensions
                                                    
                                                    
                                                    257
                                                    
                                                    
                                                    
                                                    (215
                                                    )Long-term
      pension and SERP liabilities
                                                    
                                                    
                                                    197
                                                    
                                                    
                                                    
                                                    96Other
      liabilities
                                                    
                                                    
                                                    (299
                                                    )
                                                    
                                                    
                                                    (229
                                                    )Net
      cash provided by (used in) operating activities before reorganization
      activities
                                                    
                                                    
                                                    1,935
                                                    
                                                    
                                                    
                                                    (7,701
                                                    )Net
      cash provided by (used in) for reorganization activities
                                                    
                                                    
                                                    109
                                                    
                                                    
                                                    
                                                    (2,616
                                                    )Net
      cash provided by (used in) operating activities
                                                    
                                                    
                                                    2,044
                                                    
                                                    
                                                    
                                                    (10,317
                                                    )Cash
      flows from investing activities:Additions
      to property and equipment
                                                    
                                                    
                                                    (649
                                                    )
                                                    
                                                    
                                                    (2,144
                                                    )Proceeds
      from the disposition of property and equipment
                                                    
                                                    
                                                    4
                                                    
                                                    
                                                    
                                                    43Net
      cash used in investing activities
                                                    
                                                    
                                                    (645
                                                    )
                                                    
                                                    
                                                    (2,101
                                                    )Cash
      flows from financing activities:Net
      payments on revolving credit facility
                                                    
                                                    
                                                    (820
                                                    )
                                                    
                                                    
                                                    -Net
      borrowings on DIP credit facility
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    13,373Payments
      for pre-petition liabilities and other
                                                    
                                                    
                                                    (675
                                                    )
                                                    
                                                    
                                                    (530
                                                    )Net
      cash provided by (used in) financing activities
                                                    
                                                    
                                                    (1,495
                                                    )
                                                    
                                                    
                                                    12,843Increase
      (decrease) in cash and cash equivalents
                                                    
                                                    
                                                    (96
                                                    )
                                                    
                                                    
                                                    425Cash
      and cash equivalents:Beginning
      of period
                                                    
                                                    
                                                    2,338
                                                    
                                                    
                                                    
                                                    2,280End
      of period
                                                    
                                                    $
                                                    2,242
                                                    
                                                    
                                                    $
                                                    2,705Supplemental
      disclosures:Cash
      paid during the period for:Interest
                                                    
                                                    $
                                                    333
                                                    
                                                    
                                                    $
                                                    903Income
      taxes
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Non-cash
      activities:Noncash
      change in funded status of benefit plans
                                                    
                                                    $
                                                    (50
                                                    )
                                                    
                                                    $
                                                    (179
                                                    )
 
 See
accompanying notes to consolidated financial
statements


6


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)





NOTE
1:  BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES





Organization





Hancock
Fabrics, Inc. (“Hancock” or the “Company”) is a specialty retailer committed to
serving creative enthusiasts with a complete selection of fashion and home
decorating textiles, sewing accessories, needlecraft supplies and sewing
machines.  As of May 2, 2009, Hancock operated 264 stores in 37 states
and an internet store under the domain name
hancockfabrics.com.  Hancock conducts business in one operating
business segment.





References
herein to “Hancock”, the “Company”, “we”, “our”, or “us” refer to Hancock
Fabrics, Inc. and its subsidiaries unless the context specifically indicates
otherwise. References herein to first quarter 2009 or 2009, and first quarter
2008 are for the 13 week periods ended May 2, 2009 and May 3, 2008,
respectively.





Basis
of Presentation





We
maintain our financial records on a 52-53 week fiscal year ending on the
Saturday closest to January 31.





The
accompanying unaudited Consolidated Financial Statements should be read in
conjunction with our audited Consolidated Financial Statements and accompanying
notes in our Annual Report on Form 10-K for the year ended January 31, 2009
filed with the U.S. Securities and Exchange Commission (SEC) on April 10,
2009. The accompanying (a) consolidated balance sheet as of January 31,
2009, which has been derived from audited financial statements, and
(b) unaudited consolidated financial statements have been prepared pursuant
to SEC Rule 10-01 of Regulation S-X. Certain information and note
disclosures normally included in annual financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America (GAAP) have been condensed or omitted pursuant to those rules and
regulations, although we believe that the disclosures made are adequate to make
the information not misleading.





The
unaudited results of operations for the interim periods shown in these financial
statements are not necessarily indicative of operating results for the entire
year. In the opinion of management, the accompanying unaudited Consolidated
Financial Statements recognize all adjustments of a normal recurring nature
considered necessary to fairly state our consolidated financial position as of
May 2, 2009 and May 3, 2008, and our consolidated results of operations and cash
flows for the thirteen weeks ended May 2, 2009, and May 3, 2008.





The
Consolidated Financial Statements have been prepared in accordance with
accounting principles generally accepted in the United States applicable to a
going concern. Except as otherwise disclosed, these principles assume that
assets will be realized and liabilities will be discharged in the ordinary
course of business.





Retrospective
Application of a Change in Accounting Principle





During
the fourth quarter of 2008, the Company elected to change its method of valuing
inventory to the weighted average cost (“WAC”) method, whereas in all prior
periods inventory was valued using the last-in, first-out (LIFO)
method.  The Company has determined that the WAC method of accounting
for inventory is preferable as this method better reflects our inventory at
current costs and enhances the comparability of our financial statements by
changing to the predominant method utilized in our industry. The Company has
applied this change retrospectively to the consolidated financial statements for
the thirteen weeks ended May 3, 2008 as defined within Statement of Financial
Accounting Standards (SFAS) No. 154: Accounting Changes and Error Corrections.
Accordingly, the previously reported cost of goods sold and net loss declined,
the gross profit increased by $0.8 million, and the basic and diluted loss per
share declined by $.04 for the thirteen weeks ended May 3, 2008. The elimination
of LIFO also increased inventory and shareholders equity by $37.1 million, the
amount of the LIFO reserve as of May 3, 2008.


7


Recently
Issued Accounting Standards





In
April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, “Interim
Disclosures about Fair Value of Financial Instruments.” FSP No. FAS 107-1
and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of
Financial Instruments,” and requires disclosures about fair value of financial
instruments for interim reporting periods as well as for annual financial
statements. Additionally, the guidance amends APB Opinion No. 28, “Interim
Financial Reporting,” and requires those disclosures in summarized financial
information at interim reporting periods. The provisions of FSP No. FAS
107-1 and APB 28-1 are effective for interim reporting periods ending after
June 15, 2009, and the Company does not expect that it will have any impact
on the Company’s statement of financial position.





In 2008,
the FASB issued EITF 07-05, Determining whether an Instrument (or Embedded
Feature) Is Indexed to an Entity's Own Stock, ("EITF 07-05"). EITF 07-05
provides guidance on determining what types of instruments or embedded features
in an instrument held by a reporting entity can be considered indexed to its own
stock for the purpose of evaluating the first criteria of the scope exception in
paragraph 11(a) of SFAS 133. EITF 07-05 is effective for financial statements
issued for fiscal years beginning after December 15, 2008 and early application
is not permitted. Management has completed its assessment and its adoption of
EITF 07-05 in fiscal 2009 has no impact on the Company.





Several
other new accounting standards became effective during the periods presented or
will be effective subsequent to May 2, 2009. None of these new standards had or
is expected to have a significant impact on Hancock’s Consolidated Financial
Statements.





NOTE
2 – PROCEEDINGS UNDER CHAPTER 11 AND RELATED FINANCINGS





On March
21, 2007, the Company filed a voluntary petition for reorganization under
Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy
Court for the District of Delaware. On August 1, 2008 (the “Effective Date”),
the Company’s Plan of Reorganization (the “Plan”) became effective and the
Company emerged from bankruptcy protection.





As of the
Effective Date, in general and except as otherwise provided under the Plan, the
Company was discharged and released from all claims and interests in accordance
with the Plan.  The Plan provides for payment in full in cash plus
interest, as applicable, or reinstatement of allowed administrative, secured,
priority, and general unsecured claims in addition to the retention of ownership
by holders of equity interest in the Company.  Therefore, there were
no impaired classes of creditors or stockholders.





AICPA
Statement of Position 90-7 (“SOP 90-7”), Financial Reporting by Entities in
Reorganization under the Bankruptcy Code, provides financial reporting
guidance for entities that are reorganizing under the Bankruptcy Code. The
Company implemented this guidance for all periods presented.  Per SOP
90-7, estimated claims are presented as Liabilities Subject to Compromise due to
the uncertainty of the eventual settlement amount.  Due to the Plan
becoming effective and the claims reconciliation process being substantially
complete, there is little uncertainty as to the total amount to be distributed
under the Plan.  As such, pre-petition liabilities after the Effective
Date are no longer presented as subject to compromise.


8


Pre-petition
obligations as of May 2, 2009 and January 31, 2009 (in thousands):
 
 May
      2,
                          
                          
                          January
      31,2009
                          
                          
                          2009Real
      estate claims
                          
                          $
                          1,117
                          
                          
                          $
                          1,473Unfunded
      claims (1)
                          
                          
                          -
                          
                          
                          
                          598Professional
      fee claim
                          
                          
                          725
                          
                          
                          
                          725Total
      pre-petition claims
                          
                          $
                          1,842
                          
                          
                          $
                          2,796
 
 (1)    Amount
represents claim checks that have been issued but remain outstanding as of
January 31, 2009.





NOTE
3: EMPLOYEE BENEFIT PLANS





The
following summarizes the net periodic benefit cost for Hancock’s defined benefit
pension retirement plan and its postretirement health care benefit plan for the
thirteen weeks ended May 2, 2009 and May 3, 2008 (in
thousands):





Retirement
      Plan
                                  
                                  
                                  Postretirement
      Benefit PlanThirteen
      Weeks Ended
                                  
                                  
                                  Thirteen
      Weeks EndedMay
      2,
                                  
                                  
                                  May
      3,
                                  
                                  
                                  May
      2,
                                  
                                  
                                  May
      3,2009
                                  
                                  
                                  2008
                                  
                                  
                                  2009
                                  
                                  
                                  2008Service
      costs
                                  
                                  $
                                  103
                                  
                                  
                                  $
                                  352
                                  
                                  
                                  $
                                  12
                                  
                                  
                                  $
                                  63Interest
      cost
                                  
                                  
                                  1,228
                                  
                                  
                                  
                                  1,132
                                  
                                  
                                  
                                  44
                                  
                                  
                                  
                                  139Expected
      return on assets
                                  
                                  
                                  (805
                                  )
                                  
                                  
                                  (1,374
                                  )
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -Amortization
      of prior service costs
                                  
                                  
                                  -
                                  
                                  
                                  
                                  (20
                                  )
                                  
                                  
                                  (193
                                  )
                                  
                                  
                                  (240
                                  )Recognized
      net actuarial (gain) loss
                                  
                                  
                                  210
                                  
                                  
                                  
                                  117
                                  
                                  
                                  
                                  (67
                                  )
                                  
                                  
                                  (43
                                  )Net
      periodic benefit cost
                                  
                                  $
                                  736
                                  
                                  
                                  $
                                  207
                                  
                                  
                                  $
                                  (204
                                  )
                                  
                                  $
                                  (81
                                  )





At April
30, 2009, the fair value of the assets held by the pension plan was $46.8
million reflecting a $1.2 million increase from January 31, 2009 due to
investment returns during the period.





NOTE
4:  LOSS PER SHARE





Loss per
share is presented for basic and diluted earnings per share.  Basic
earnings per share excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common shares
outstanding for the period.  Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the
Company.


9


COMPUTATION
OF LOSS PER SHARE
 
 (in
      thousands, except for share and
                                        
                                        Thirteen
      Weeks Endedper
      share amounts)
                                        
                                        May
      2,
                                        
                                        
                                        May
      3,2009
                                        
                                        
                                        2008Basic
      and diluted loss per share:Net
      loss
                                        
                                        $
                                        (882
                                        )
                                        
                                        $
                                        (5,317
                                        )Weighted
      average number of common shares outstanding during period
                                        
                                        
                                        19,218,596
                                        
                                        
                                        
                                        18,983,877Basic
      and diluted loss per share
                                        
                                        $
                                        (0.05
                                        )
                                        
                                        $
                                        (0.28
                                        )Weighted
      average common stock equivalents not included in EPS because the effect
      would be anti-dilutive
                                        
                                        
                                        11,161,525
                                        
                                        
                                        
                                        1,484,109





NOTE
5:  RESERVE FOR STORE CLOSINGS AND DISCONTINUED
OPERATIONS





Reserves
for store closings are established based on estimates of net lease obligations
and other store closing costs. At May 2, 2009, the total reserve balance
included in current and noncurrent liabilities was $0.9 million, which
represents the present value of the future net lease obligations for the
locations which have been closed.





During
the 13 weeks ended May 2, 2009, income of $49,000 was recognized in earnings
from discontinued operations for the settlement of claims on stores closed in
prior years. During the thirteen weeks ended May 3, 2008, there was
approximately $0.5 million in income attributable to discontinued operations
from prior years.  This was the result of a reduction in the closed store
reserve due to settlement of certain real estate bankruptcy
claims.





The
activity in the reserve is as follows (in thousands):





Addition
      toJanuary
      31,
                    
                    
                    (Reduction
      in)
                    
                    
                    
                    
                    
                    
                    
                    
                    May
      2,2009
                    
                    
                    Reserve
                    
                    
                    Interest
                    
                    
                    Payments
                    
                    
                    2009Lease
      obligations
                    
                    $
                    1,219
                    
                    
                    $
                    300
                    
                    
                    $
                    1
                    
                    
                    $
                    (644
                    )
                    
                    $
                    876





NOTE
6 – LONG-TERM DEBT OBLIGATIONS




At
May 2, 2009, the Company had outstanding borrowings of $31.8 million under
its revolving credit facility (the “Revolver”) with General Electric Capital
Corporation which has a maturity date of August 1, 2013. Outstanding
standby letters of credit were $6.3 million, outstanding documentary letters of
credit were $0.8 million and unused excess availability was $34.9 million at
May 2, 2009. The Revolver is collateralized by a fully perfected first
priority security interest in all real and personal, tangible and intangible
assets of the Company.  The Company is not subject to any financial
covenants pursuant to this Credit Facility.




At the
Company’s option, any portion of the outstanding borrowings can be converted to
LIBOR based rates plus an applicable margin, and the remainder bears interest at
a floating interest rate plus the applicable margins. At May 2, 2009, the
floating interest rate was 3.25% and the Company had $30.0 million of its
outstanding borrowings at a LIBOR based interest rate of 2.11%


10


In
addition to the Revolver, the Company has $21.2 million of Floating Rate Secured
Notes (the “Notes”) outstanding at May 2, 2009. The Notes mature on August 1,
2013, are subordinated to the Revolver, and are secured by a junior lien on all
of the Company’s assets. Interest on the Notes is payable quarterly and for the
interest period ended May 1, 2009 the Company elected to make the interest
payment in-kind by issuing additional Notes totaling $0.3 million. The amount of
additional notes issued was based on an effective interest rate of
6.7%.  An additional $0.6 million of interest expense was recorded in
the quarter related to the amortization of the discount recorded at the time of
issuance of the Notes. As of May 2, 2009 the unamortized discount was $9.9
million.




ITEM
2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS


OF
OPERATIONS





Forward
Looking Statements




This
Quarterly Report on Form 10-Q (“Quarterly Report”) contains forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995.  Such statements are not historical facts and reflect our
current views regarding matters such as operations and financial
performance.  In general, forward-looking statements are identified by
such words or phrases as “anticipates,” “believes,” “approximates,” “estimates,”
“expects,” “intends” or “plans” or the negative of those words or other
terminology.  Forward-looking statements involve inherent risks and
uncertainties; our actual results could differ materially from those expressed
in our forward-looking statements.





The risks
and uncertainties, either alone or in combination, that could cause our actual
results to differ from those expressed in our forward-looking statements
include, but are not limited to, those that are discussed in our Annual Report
on Form 10-K filed with the SEC on April 10, 2009, under Item 1A. Risk
Factors.  Other risks not presently known to us, or that we currently
believe are immaterial, could also adversely affect our business, financial
condition or results of operations.  Forward-looking statements speak
only as of the date made, and neither Hancock nor its management undertakes any
obligation to update or revise any forward-looking statement.





Our
Business





Hancock
Fabrics, Inc. is a specialty retailer committed to serving creative enthusiasts
with a complete selection of fashion and home decorating textiles, sewing
accessories, needlecraft supplies and sewing machines.  We are one of
the largest fabric retailers in the United States, operating 264 stores in 37
states as of May 2, 2009.  Our stores present a broad selection of
fabrics and notions used in apparel sewing, home decorating and quilting
projects.





Overview





Financial
highlights include:





·
            Net
      sales for the first 13 weeks of 2009 were $64.1 million compared with
      $63.8 million in 2008, and comparable sales increased 2.3% compared with a
      3.1% decrease in the previous year.





·
            Our
      online sales for the first 13 weeks of 2009, which are included in the
      comparable sales above, increased 9.5% to $0.9
  million.


11


·
            Operating
      income increased by $2.8 million from a $2.2 million loss in 2008 to a
      $0.6 million profit in 2009.





·
            The
      net loss narrowed to $0.9 million, or $0.05 per share, in 2009 from $5.3
      million, or $0.28 per share in
2008.





·
            Inventories
      were reduced by over $3.6 million during the current quarter and have been
      reduced by $17.7 million over the past 12
  months.





·
            The
      amount of cash generated from operations before reorganization activities
      increased by $9.6 million to $1.9 million during the 13 week
      period.




We use a
number of key performance measures to evaluate our financial performance,
including the following:





Thirteen
      Weeks EndedMay
      2,
                                                          2009
                                                        
                                                        
                                                        May
      3,
                                                          2008Net
      sales (in thousands)
                                                        
                                                        $
                                                        64,069
                                                        
                                                        
                                                        $
                                                        63,816Gross
      margin percentage
                                                        
                                                        
                                                        45.1
                                                        %
                                                        
                                                        
                                                        44.8
                                                        %Number
      of storesOpen
      at end of period(1)
                                                        
                                                        
                                                        264
                                                        
                                                        
                                                        
                                                        270Comparable
      stores at period end (2)
                                                        
                                                        
                                                        263
                                                        
                                                        
                                                        
                                                        269Sales
      growthAll
      retail outlets
                                                        
                                                        
                                                        0.4
                                                        %
                                                        
                                                        
                                                        (7.8
                                                        )%Comparable
      retail outlets (2)
                                                        
                                                        
                                                        2.3
                                                        %
                                                        
                                                        
                                                        (3.1
                                                        )%Total
      store square footage at period end (in thousands)
                                                        
                                                        
                                                        3,784
                                                        
                                                        
                                                        
                                                        3,857Net
      sales per total square footage
                                                        
                                                        $
                                                        16.93
                                                        
                                                        
                                                        $
                                                        16.55




(1)
              Open
      store count does not include the internet store.(2)
              A
      new store is included in the comparable sales computation immediately upon
      reaching its one-year anniversary.  In those rare instances
      where stores are either expanded or down-sized, the store is not treated
      as a new store and, therefore, remains in the computation of comparable
      sales. The comparable sales decrease for 2008 excluded a 0.3% benefit from
      liquidation sales occurring in one store
  location.





Results
of Operations





The
following table sets forth, for the periods indicated, selected statement of
operations data expressed as a percentage of sales.  This table should
be read in conjunction with the following discussion and with our Consolidated
Financial Statements, including the related notes.


12


Thirteen
      Weeks EndedMay
      2,
                      
                      
                      May
      3,2009
                      
                      
                      2008Sales
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Cost
      of goods sold
                      
                      
                      54.9
                      
                      
                      
                      55.2Gross
      profit
                      
                      
                      45.1
                      
                      
                      
                      44.8Selling,
      general and administrative expense
                      
                      
                      42.4
                      
                      
                      
                      46.6Depreciation
      and amortization
                      
                      
                      1.7
                      
                      
                      
                      1.7Operating
      income (loss)
                      
                      
                      1.0
                      
                      
                      
                      (3.5
                      )Reorganization
      expense, net
                      
                      
                      0.4
                      
                      
                      
                      4.2Interest
      expense, net
                      
                      
                      2.1
                      
                      
                      
                      1.5Loss
      from continuing operations before income taxes
                      
                      
                      (1.5
                      )
                      
                      
                      (9.2
                      )Income
      taxes
                      
                      
                      -
                      
                      
                      
                      -Income
      from discontinued operations
                      
                      
                      0.1
                      
                      
                      
                      0.9Net
      loss
                      
                      
                      (1.4
                      )%
                      
                      
                      (8.3
                      )%
 
 Net
Sales
 
 Thirteen
      Weeks Ended(in
      thousands)
                              
                              May
      2,
                              
                              
                              May
      3,2009
                              
                              
                              2008Current
      store base
                              
                              $
                              63,152
                              
                              
                              $
                              61,677Closed
      stores
                              
                              
                              -
                              
                              
                              
                              1,301E-Commerce
                              
                              
                              917
                              
                              
                              
                              838Total
      net sales
                              
                              $
                              64,069
                              
                              
                              $
                              63,816


The
current store base above represents the 264 stores which are currently in
operation. Of these 264 stores, 263 were in operation at May 3, 2008. Comparable
sales of these 263 stores were an increase of 2.3% over the prior
year.  These increases were driven by a 5.8% increase in transactions
offset by a 3.5% decrease in average ticket.





The
thirteen weeks ended May 3, 2008 include stores which were closed during fiscal
2008 but did not qualify as discontinued operations.  There were 7
stores closed in fiscal 2008 which did not qualify as discontinued
operations.





The
Company launched a new e-commerce platform in August 2008 which has provided a
considerable increase in our e-commerce business.  Sales in the first
quarter of fiscal 2009 compared to the same period of 2008 were up
9.5%.





Our
merchandise mix has had minimal change year over year, as reflected in the table
below.  We attribute the downward shift in home decorating to the
recent economic difficulties which limit the amount of discretionary income
available to purchase higher ticket fabrics required for
decorating.


13


Thirteen
      Weeks EndedMay
      2,
                        
                        
                        May
      3,2009
                        
                        
                        2008Apparel
      Fabrics
                        
                        
                        27
                        %
                        
                        
                        27
                        %Home
      Decorating
                        
                        
                        22
                        %
                        
                        
                        24
                        %Quilting/Craft
                        
                        
                        26
                        %
                        
                        
                        25
                        %Notions
      and Accessories
                        
                        
                        25
                        %
                        
                        
                        24
                        %100
                        %
                        
                        
                        100
                        %





Gross
Margin





Costs of
goods sold include:





·
            the
      cost of merchandise





·
            inventory
      rebates and allowances including term
discounts





·
            inventory
      shrinkage and valuation adjustments





·
            freight
      charges





·
            costs
      associated with our sourcing operations, including payroll and related
      benefits





·
            costs
      associated with receiving, processing, and warehousing
      merchandise





The
classification of these expenses varies across the retail industry.





Specific
components of cost of goods sold for the first quarter of fiscal 2009 and 2008
are as follows:





Thirteen
      Weeks EndedMay
      2,
                                  
                                  
                                  %
      of
                                  
                                  
                                  May
      3,
                                  
                                  
                                  %
      of(in
      thousands)
                                  
                                  2009
                                  
                                  
                                  Sales
                                  
                                  
                                  2008
                                  
                                  
                                  SalesTotal
      net sales
                                  
                                  $
                                  64,069
                                  
                                  
                                  
                                  100.0
                                  %
                                  
                                  $
                                  63,816
                                  
                                  
                                  
                                  100.0
                                  %Merchandise
      cost
                                  
                                  
                                  29,728
                                  
                                  
                                  
                                  46.4
                                  %
                                  
                                  $
                                  29,880
                                  
                                  
                                  
                                  46.8
                                  %Freight
                                  
                                  
                                  1,798
                                  
                                  
                                  
                                  2.8
                                  %
                                  
                                  
                                  2,051
                                  
                                  
                                  
                                  3.2
                                  %Sourcing
      and warehousing
                                  
                                  
                                  3,631
                                  
                                  
                                  
                                  5.7
                                  %
                                  
                                  
                                  3,316
                                  
                                  
                                  
                                  5.2
                                  %Gross
      Profit
                                  
                                  $
                                  28,912
                                  
                                  
                                  
                                  45.1
                                  %
                                  
                                  $
                                  28,569
                                  
                                  
                                  
                                  44.8
                                  %





We have
seen a reduction of 40 basis points in the direct cost of merchandise compared
to the first quarter of 2008.  This is a result of increasing the
amount of product sourced from overseas, continually expanding our vendor
network domestically, and increasing our focus on reducing product
shrinkage.





Freight
expense has declined by 40 basis points benefitting from stable fuel prices
compared to the prior year as well as efficiencies within our shipping process.
The efficiencies gained within our shipping process are expected to continue to
help offset any increase in fuel costs going forward.


14


Sourcing
and warehousing costs for the Company vary based on both the level of inventory
received during any period and the rate of inventory turns. These costs
increased by 50 basis points primarily due to an increase in inventory turns,
which reduces the costs being capitalized into inventory.





In total,
our operational initiatives have resulted in an increase in gross margin of 30
basis points over 2008 levels.





Sales,
General & Administrative Expenses





Sales,
general & administrative expenses include:





·
            payroll
      and related benefits (for our store operations, field management, and
      corporate functions)





·
            advertising





·
            general
      and administrative expenses





·
            occupancy
      including rent, common area maintenance, taxes and insurance for our
      retail locations





·
            operating
      costs of our headquarter facilities





·
            other
      expense (income)





Specific
components of sales, general & administrative expenses include:





Thirteen
      Weeks EndedMay
      2,
                                  
                                  
                                  %
      of
                                  
                                  
                                  May
      3,
                                  
                                  
                                  %
      of(in
      thousands)
                                  
                                  2009
                                  
                                  
                                  Sales
                                  
                                  
                                  2008
                                  
                                  
                                  SalesRetail
      store labor costs
                                  
                                  $
                                  10,066
                                  
                                  
                                  
                                  15.7
                                  %
                                  
                                  $
                                  10,869
                                  
                                  
                                  
                                  17.0
                                  %Advertising
                                  
                                  
                                  2,111
                                  
                                  
                                  
                                  3.3
                                  %
                                  
                                  
                                  1,847
                                  
                                  
                                  
                                  2.9
                                  %Store
      occupancy
                                  
                                  
                                  7,364
                                  
                                  
                                  
                                  11.5
                                  %
                                  
                                  
                                  7,448
                                  
                                  
                                  
                                  11.7
                                  %Retail
      SG&A
                                  
                                  
                                  5,011
                                  
                                  
                                  
                                  7.9
                                  %
                                  
                                  
                                  5,880
                                  
                                  
                                  
                                  9.2
                                  %Corp
      SG&A
                                  
                                  
                                  2,629
                                  
                                  
                                  
                                  4.1
                                  %
                                  
                                  
                                  3,706
                                  
                                  
                                  
                                  5.8
                                  %Total
      SG&A
                                  
                                  $
                                  27,181
                                  
                                  
                                  
                                  42.4
                                  %
                                  
                                  $
                                  29,750
                                  
                                  
                                  
                                  46.6
                                  %





Retail
Store Labor Costs – The Company achieved greater efficiency in store labor costs
during 2009 compared to the same period last year.  These savings were
driven by a reduction in direct store labor resulting from additional corporate
oversight in relation to employee scheduling, leveraging our technology
investment in store infrastructure, and the conversion of the majority of our
store associates to part-time with limited benefits.





Advertising
– The increase in advertising spend was driven equally by an incremental
increase in advertising to support our e-commerce business and by a limited
amount of store advertising shifting from the second quarter back to the first
quarter.





Store
Occupancy – These costs have remained relatively constant despite the renewal of
a significant number of leases over the past twelve
months.  Significant effort has been incurred to restructure rents as
a result of the current commercial real estate market.  These efforts
have resulted in rent reductions as well as term extensions.


15


Retail
SG&A – These costs associated with our retail locations have decreased
significantly in relation to the prior year amount as a result of strict
budgetary control exercised by our store personnel.  Certain recurring
expenditures have been evaluated as to the timing and extent necessary and have
been eliminated when possible if there is no direct impact on service to our
customers.





Corporate
SG&A – Our first quarter fiscal 2009 corporate costs have been reduced by
lowering the professional fees associated with compliance requirements, reducing
the expense associated with equity grants, and a reduction in previously accrued
bankruptcy claims which were applicable to continuing operations.





Reorganization
Expenses, Net





Thirteen
      Weeks EndedMay
      2,
                        
                        
                        %
      of
                        
                        
                        May
      3,
                        
                        
                        %
      of(in
      thousands)
                        
                        2009
                        
                        
                        Sales
                        
                        
                        2008
                        
                        
                        SalesReorganziation
      expense, net
                        
                        $
                        239
                        
                        
                        
                        0.4
                        %
                        
                        $
                        2,676
                        
                        
                        
                        4.2
                        %





Reorganization
expenses are comprised of the cost of professional fees associated with our
bankruptcy proceedings.  These costs were significant during the
bankruptcy through the time of emergence in August, 2008.  There are
limited bankruptcy issues remaining and these costs are not expected to be
significant going forward as compared to the prior year.





Interest
Expense, Net





Thirteen
      Weeks Ended(in
      thousands)
                        
                        May
      2,
                        
                        
                        %
      of
                        
                        
                        May
      3,
                        
                        
                        %
      of2009
                        
                        
                        Sales
                        
                        
                        2008
                        
                        
                        SalesInterest
      expense, net
                        
                        $
                        1,334
                        
                        
                        
                        2.1
                        %
                        
                        $
                        989
                        
                        
                        
                        1.5
                        %





The
Company’s interest costs are driven by borrowings on our credit
facilities.  Our current credit facilities consist of both an asset
based facility and a subordinated debt facility.  Interest expense for
the first quarter of fiscal 2009 includes $0.6 million of note discount
amortization costs and $0.3 million of interest paid with the issuance of
additional notes.  Excluding these non-cash items, interest expense
for the 2009 period was $0.4 million, or 0.6% of sales, compared to $1.0 million
or 1.5% of sales in 2008.





Income
Taxes





No income
tax benefit was recognized during either period presented due to the Company’s
uncertainty in realizing future tax benefits generated by tax
losses.





Loss
from Discontinued Operations





(in
      thousands)
                    
                    Thirteen
      Weeks EndedMay
      2,
                    
                    
                    %
      of
                    
                    
                    May
      3,
                    
                    
                    %
      of2009
                    
                    
                    Sales
                    
                    
                    2008
                    
                    
                    SalesIncome
      from discountinued operations
                    
                    $
                    49
                    
                    
                    
                    0.1
                    %
                    
                    $
                    542
                    
                    
                    
                    0.8
                    %


16


The
income from discontinued operations relates to the 26 stores closed in 2006 and
124 stores closed in 2007 which qualified as discontinued
operations.  All of these store closures were part of a reorganization
plan implemented prior to seeking bankruptcy protection. The income resulted
from the settlement of leases rejected in bankruptcy at amounts less than
anticipated.





Liquidity
and Capital Resources





Hancock's
primary capital requirements are for the financing of inventories and, to a
lesser extent, for capital expenditures relating to store locations and its
distribution facility.  Funds for such purposes have historically been
generated from Hancock's operations, short-term trade credit in the form of
extended payment terms from suppliers for inventory purchases, and borrowings
from commercial lenders.





We
anticipate that we will be able to satisfy our working capital requirements,
planned capital expenditures and debt service requirements with available cash,
proceeds from cash flows from operations, short-term trade credit, borrowings
under our revolving credit facility and other sources of
financing.  We expect to generate adequate cash flow from operating
activities to sustain current levels of operations.





Hancock’s
cash flow related information as of the first quarter of fiscal 2009 and 2008
follows (in thousands):





Thirteen
      Weeks EndedMay
      2,
                                    
                                    
                                    May
      3,2009
                                    
                                    
                                    2008Net
      cash flows provided (used):Operating
      activites
                                    
                                    $
                                    2,044
                                    
                                    
                                    $
                                    (10,317
                                    )Investing
      activities
                                    
                                    
                                    (645
                                    )
                                    
                                    
                                    (2,101
                                    )Financing
      activites
                                    
                                    
                                    (1,495
                                    )
                                    
                                    
                                    12,843





Operating
Activities





Net cash
inflows provided by operating activities increased by $12.4 million compared to
the prior year.  This increase was primarily the result of the
significant reduction in inventory balances as increased emphasis is being
placed on supply chain management combined with a much smaller net
loss.





Investing
Activities





Cash used
for investing activities consists primarily of purchases and sales of property
and equipment. Capital expenditures during the current year consisted
primarily of two store remodels and minor retail location
improvements.





Financing
Activities





Cash
provided by operations provided funds to reduce debt by $0.8 million and make
payments of $0.7 million toward pre-petition obligations.





Credit
Facilities





The
following should be read in conjunction with Note 8 to the Company’s Annual
Report on Form 10-K filed April 10, 2009.


17


As of May
2, 2009, the Company had outstanding borrowings under the Revolver of $31.8
million and outstanding letters of credit of $7.1 million.  Additional
amounts available to borrow at that time were $34.9 million.





As of May
2, 2009, the Note balance was $21.2 million and the warrant discount on Notes
Payable was $9.9 million.





Since the
Effective Date through May 2, 2009, the Company’s gross debt plus liabilities
subject to compromise decreased by approximately $26.3 million.





Off-Balance
Sheet Arrangements





Hancock
has no off-balance sheet financing arrangements. Hancock leases its retail
fabric store locations mainly under non-cancelable operating
leases.  Four of the Company’s store leases qualified for capital
lease treatment. Future payments under operating leases are appropriately
excluded from the Company’s balance sheet.  Capital lease obligations
are, however, reflected on the Company’s balance sheet.





Contractual
Obligations and Commercial Commitments





Hancock
has an arrangement within its secured revolving credit facility that provides up
to $20 million in letters of credit.  At May 2, 2009, Hancock had
commitments of $0.8 million on documentary letters of credit under the facility,
which support purchase orders for merchandise.  Hancock also has $6.3
million on standby letters of credit to guarantee payment of potential insurance
claims.  Hancock leases its retail fabric store locations under
operating leases expiring at various dates through 2024.





The
Company has no standby repurchase obligations or guarantees of other entities'
debt.





Critical
Accounting Policies and Estimates





The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to adopt
accounting policies and make significant judgments and estimates to develop
amounts reflected and disclosed in the financial statements. In many cases,
there are alternative policies or estimation techniques that could be used. We
maintain a process to review the application of our accounting policies and to
evaluate the appropriateness of the many estimates that are required to prepare
the financial statements of a large corporation. However, even under optimal
circumstances, estimates routinely require adjustment based on changing
circumstances and the receipt of new or better information. There have been no
significant changes to our accounting policies and estimates as discussed in our
Annual Report on Form 10-K for the fiscal year ended January 31,
2009.





Related
Party Transactions





See Note
17 in the Company’s Annual Report on Form 10-K filed April 10, 2009, for details
regarding the sole related party transaction that the Company has entered
into.





The
Company has no other balances with any other related parties, nor has it had any
other material transactions with related parties during the thirteen week
periods ended May 2, 2009 and May 3, 2008.


18


Effects
of Inflation





Inflation
in labor and occupancy costs could significantly affect Hancock's
operations.  Many of Hancock's employees are paid hourly rates related
to federal and state minimum wage requirements; accordingly, any increases in
those requirements will affect Hancock.  In addition, payroll taxes,
employee benefits, and other employee costs continue to
increase.  Health insurance costs, in particular, continue to rise at
a high rate in the United States each year, and higher employer contributions to
Hancock’s pension plan could be necessary if investment returns are
weak.  Costs of leases for new store locations remain stable, but
renewal costs of older leases continue to increase.  Hancock believes
the practice of maintaining adequate operating margins through a combination of
price adjustments and cost controls, careful evaluation of occupancy needs, and
efficient purchasing practices are the most effective tools for coping with
increased costs and expenses.





Seasonality





Hancock's
business is seasonal.  Peak sales periods occur during the fall and
early spring weeks, while the lowest sales periods occur during the summer.
Working capital requirements needed to finance our operations fluctuate during
the year and reach their highest levels during the second and third fiscal
quarters as we increase our inventory in preparation for our peak selling season
during the fourth quarter.





ITEM
3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS





Hancock
does not hold derivative financial or commodity instruments at May 2,
2009.





Interest
Rate Risk





The
Company is exposed to financial market risks, including changes in interest
rates. At the Company's option, all loans under the Revolver bear interest at
either (a) a floating interest rate plus the applicable margins or (b) absent a
default, a fixed interest rate for periods of one, two or three months equal to
the reserve adjusted London Interbank Offered Rate, or LIBOR, plus the
applicable margins.




As of May
2, 2009, the Company had borrowings outstanding of approximately $31.8 million
under the Revolver.  If interest rates increased 100 basis points, the
Company’s annual interest expense would increase approximately $0.3 million,
assuming borrowings under the Revolver of $31.8 million as existed at May 2,
2009.





In
addition to the Revolver, the Company issued $20.0 million of Floating Rate
Secured Notes (the “Notes”) on August 1, 2008.  Interest on the Notes
is payable quarterly at LIBOR plus 4.50%.  Interest for the first four
quarters may be paid by the issuance of additional notes at a rate equal to
LIBOR plus 5.50%.





The
Company has elected to make all interest payments due to date on the Notes by
issuing additional notes which resulted in the capitalization of $1.2 million of
interest into the outstanding balance at May 2, 2009.  If interest
rates increased 100 basis points, the Company’s annual interest expense would
increase $0.2 million, assuming borrowings under the Notes of $21.2 million as
existed at May 2, 2009.




Foreign
Currency Risk





All of
the Company’s business is transacted in U.S. dollars and, accordingly,
devaluation of the dollar against other currencies has increased product costs
although this did not significantly impact the 13 week period ended May 2,
2009.  As of May 2, 2009, the Company had no financial instruments
outstanding that were sensitive to changes in foreign currency
rates.


19


ITEM
4T. CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





The
Company maintains disclosure controls and procedures that are designed to ensure
that information required to be disclosed in the reports filed or submitted
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC’s rules and forms and that such
information is accumulated and communicated to the Company’s management,
including the President  and Chief Executive Officer (principal
executive officer) and Executive Vice President and Chief Financial Officer
(principal financial officer), as appropriate, to allow timely decisions
regarding the required disclosures.




As of the
end of the period covered by this report (May 2, 2009), the Company’s
management, under the supervision and with the participation of the Company’s
President and Chief Executive Officer (principal executive officer) and
Executive Vice President and Chief Financial Officer (principal financial
officer), performed an evaluation of the effectiveness of our disclosure
controls and procedures (as such term is defined in the
Rules 13a-15(e) and 15d-15(e) under the Exchange Act).
 Based upon this evaluation and as a result of the remediation activities
completed during fiscal 2008, the Company’s principal executive officer and
principal financial officer concluded that the Company’s disclosure controls and
procedures were effective as of May 2, 2009.




Changes in
Internal Control Over Financial Reporting




There
have not been any changes in our internal controls over financial reporting (as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act)
within the fiscal quarter to which this report relates that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.




PART
II.  OTHER INFORMATION:





ITEM
1: LEGAL PROCEEDINGS





On March
21, 2007, the Company and its affiliated debtors filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code, in the
United States Bankruptcy Court for the District of Delaware. The reorganization
case is being administered under the caption "In re Hancock Fabrics, Inc., et
al., Case No. 07-10353 (BLS)."  On June 10, 2008, the Company filed
its joint plan of reorganization (Docket No. 2746) (as modified and including
all documents ancillary thereto, the “Plan”) and, thereafter, its related
Court-approved notice of plan confirmation hearing.  On July 22, 2008,
the Court entered an order confirming the Plan (Docket No. 2996).  On
August 1, 2008, the Plan became effective, and the Company emerged from
bankruptcy protection.




The
Company is a party to several legal proceedings and claims. Although the
outcome of such proceedings and claims cannot be determined with certainty, we
are of the opinion that it is unlikely that these proceedings and claims will
have a material effect on the financial condition or operating results of the
Company.





ITEM
1A: RISK FACTORS





The risk
factors listed in Part I “Item 1A. Risk Factors” in the Annual Report
on Form 10-K for the fiscal year ended January 31, 2009, should be
considered with the information provided elsewhere in this Quarterly Report on
Form 10-Q, which could materially adversely affect the business, financial
condition or results of operations.  There have been no material changes to
the risk factors as previously disclosed in such Annual Report on Form
10-K.


20


ITEM
2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS





In June
of 2000 the Board of Directors authorized the repurchase of up to 2,000,000
shares of the Company’s Common Stock from time to time when warranted by market
conditions.  There have been 1,756,437 shares purchased under this
authorization through May 2, 2009 and the number of shares that may yet be
purchased under the plans remains unchanged from the year ended January 31, 2009
at 243,563.





The
Registrant did not sell any unregistered equity securities during the period
covered by this Quarterly Report.





ITEM
3: DEFAULTS UPON SENIOR SECURITIES





None.





ITEM
4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM
5: OTHER INFORMATION





None.





ITEM
6: EXHIBITS





31.1
            Certification
      of Chief Executive Officer Pursuant to Rule 13a-14(a) Under The Securities
      Exchange Act of 1934




31.2
            Certification
      of Chief Financial Officer Pursuant to Rule 13a-14(a) Under The Securities
      Exchange Act of 1934




32
            Certification
      of Chief Executive Officer and Chief Financial Officer Pursuant to 18
      U.S.C. Section 1350, as Adopted Pursuant To Section 906 of The
      Sarbanes-Oxley Act of 2002


21


SIGNATURE





Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.





HANCOCK
      FABRICS, INC.(Registrant)By:
              /s/ Robert W. DriskellRobert
      W. DriskellExecutive
      Vice President andChief
      Financial Officer





Date:    June
10, 2009


22