##### Table of Contents



FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 28, 2001

OR

(    ) TRANSITION REPORT PURSUANT TO SECTION 13 OF 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
(State or other jurisdiction of
incorporation or organization) |  | 64-0740905
(I. R. S. Employer
Identification No.)

3406 West Main Street, Tupelo, MS 38803
(Address of principal executive offices)
(Zip Code)

(662) 842-2834
(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 the number of shares outstanding of each of the issuers classes of
common stock, as of the latest practical date.

As of October 28, 2001, the registrant had outstanding an aggregate of
18,000,200 shares of common stock, $.01 par value.



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TABLE OF CONTENTS



|                                                                                              |                                                                     |                                                |  |  |  |  |  | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------- | ---------------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION                                                                
|                                                                                              |                                                                     | CONSOLIDATED BALANCE SHEET                    
|                                                                                              |                                                                     | CONSOLIDATED STATEMENT OF EARNINGS            
|                                                                                              |                                                                     | CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
|                                                                                              |                                                                     | CONSOLIDATED STATEMENT OF CASH FLOWS          
|                                                                                              |                                                                     | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS    
|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|PART II. OTHER INFORMATION:                                                                  
|                                                                                              | Item 3: Quantitative and Qualitative Disclosures about Market Risks
|                                                                                              | Item 6. Exhibits and Reports on Form 8-K                           
|SIGNATURE                                                                                    



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##### Table of Contents



INDEX

|                               |                                                                                               |                                                                                                                             |  |         |       |  |  |  |  | 
|------------------------------ | --------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- |  | ------- | ----- |  |  |  |  | 
|                               |                                                                                               |                                                                                                                             |  | Page   
|                               |                                                                                               |                                                                                                                             |  | Numbers
|Part I. Financial Information: |                                                                                               |                                                                                                                             |  |         |       |  |  | 
|                              
|                              
|                              
|                              
|                               | Item 1. Financial Statements (unaudited)                                                      |                                                                                                                             |  |         |       |  |  |  | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Balance Sheet as of October 28, 2001 and January 28, 2001                                                      |  |         | 3     |  |  |  |  | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statement of Earnings for the Thirteen Weeks and Thirty-nine
Weeks Ended October 28, 2001 and October 29, 2000 |  |         | 4     |  |  |  |  | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statement of Shareholders Equity for the Thirty-nine Weeks
Ended October 28, 2001                             |  |         | 5     |  |  |  |  | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Consolidated Statement of Cash Flows for the Thirty-nine Weeks Ended
October 28, 2001 and October 29, 2000                  |  |         | 6     |  |  |  |  | 
|                              
|                              
|                              
|                              
|                               |                                                                                               | Notes to Consolidated Financial Statements                                                                                  |  |         | 7 - 8 | 
|                              
|                              
|                              
|                              
|                               | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                             |  | 8 - 11  |      
|                              
|                              
|                              
|                              
|Part II. Other Information:    |                                                                                               |                                                                                                                             |  |         |       |  |  | 
|                              
|                              
|                              
|                              
|                               | Item 3. Quantitative and Qualitative Disclosures about Market Risks                           |                                                                                                                             |  | 11      |      
|                              
|                              
|                              
|                              
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                                             |  | 11      |      
|                              
|                              
|                              
|                              
|                               | Signature                                                                                     |                                                                                                                             |  | 11      |      

-2-



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##### Table of Contents






PART I. FINANCIAL INFORMATION

HANCOCK FABRICS, INC.




CONSOLIDATED BALANCE SHEET


(unaudited)


|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |          |         | 
|-------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------- | ------ | ----------- | ------- |  | ------ | -------- | ------- | 
|(in thousands, except for                          |                                                                                                                            | October 28,                                       |        | January 28,
|share and per share amounts)                       |                                                                                                                            | 2001                                              |        | 2001       
|                                                   |                                                                                                                            |                                                   |        |            
|Assets                                             |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                  
|                                                  
|                                                  
|                                                  
|Current assets:                                    |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Cash and cash equivalents                         |        | $           | 4,678   |  |        | $        | 3,891   | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Receivables, less allowance for doubtful accounts |        |             | 982     |  |        |          | 589     | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Inventories                                       |        |             | 141,091 |  |        |          | 138,657 | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Prepaid expenses                                  |        |             | 2,131   |  |        |          | 1,677   | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Total current assets                              |        |             | 148,882 |  |        |          | 144,814 | 
|                                                  
|Property and equipment, at depreciated cost        |                                                                                                                            |                                                   | 28,502 |             |         |  | 25,616 |         
|                                                  
|                                                  
|                                                  
|                                                  
|Deferred tax asset                                 |                                                                                                                            |                                                   | 7,776  |             |         |  | 10,486 |         
|                                                  
|                                                  
|                                                  
|                                                  
|Pension payment in excess of required contribution |                                                                                                                            |                                                   | 3,642  |             |         |  | 3,078  |         
|                                                  
|                                                  
|                                                  
|                                                  
|Other assets                                       |                                                                                                                            |                                                   | 8,665  |             |         |  | 8,735  |         
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Total assets                                      |        | $           | 197,467 |  |        | $        | 192,729 | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|Liabilities
and Shareholders Equity               |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                  
|                                                  
|                                                  
|                                                  
|Current liabilities:                               |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Accounts payable                                  |        | $           | 41,153  |  |        | $        | 38,665  | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Accrued liabilities                               |        |             | 15,274  |  |        |          | 15,367  | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Deferred tax liabilities                          |        |             | 2,959   |  |        |          | 4,726   | 
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   |                                                                                                                            | Income taxes                                      |        |             | 2,191   |  |        |          | 6,179   | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Total current liabilities                         |        |             | 61,577  |  |        |          | 64,937  | 
|                                                  
|Long-term debt obligations                         |                                                                                                                            |                                                   | 17,000 |             |         |  | 16,000 |         
|                                                  
|                                                  
|                                                  
|                                                  
|Postretirement benefits other than pensions        |                                                                                                                            |                                                   | 21,730 |             |         |  | 21,278 |         
|                                                  
|                                                  
|                                                  
|                                                  
|Reserve for store closings                         |                                                                                                                            |                                                   | 2,004  |             |         |  | 3,012  |         
|                                                  
|                                                  
|                                                  
|                                                  
|Other liabilities                                  |                                                                                                                            |                                                   | 4,496  |             |         |  | 4,950  |         
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Total liabilities                                 |        |             | 106,807 |  |        |          | 110,177 | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|Commitments and contingencies                      |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                  
|                                                  
|                                                  
|                                                  
|Shareholders equity:                              |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Common stock, $.01 par value; 80,000,000 shares authorized;
30,010,288 and 29,190,335 issued and outstanding, respectively |                                                   |        | 300         |         |  |        | 292      |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Additional paid-in capital                                                                                                 |                                                   |        | 45,178      |         |  |        | 39,094   |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Retained earnings                                                                                                          |                                                   |        | 188,610     |         |  |        | 183,917  |        
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Treasury stock, at cost, 12,010,088 and 11,905,378
shares held, respectively                                               |                                                   |        | (136,304    | )       |  |        | (135,583 | )      
|                                                  
|                                                  
|                                                  
|                                                  
|                                                   | Deferred compensation on restricted stock
incentive plan                                                                   |                                                   |        | (7,124      | )       |  |        | (5,168   | )      
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Total shareholders equity                        |        |             | 90,660  |  |        |          | 82,552  | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         
|                                                   |                                                                                                                            | Total liabilities and shareholders equity        |        | $           | 197,467 |  |        | $        | 192,729 | 
|                                                   |                                                                                                                            |                                                   |        |             |         |  |        |         

See accompanying notes to consolidated financial statements.

-3-



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##### Table of Contents






CONSOLIDATED STATEMENT OF EARNINGS

(unaudited)


|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |         |  
|------------------------------------- | ------------------------------------- | -------------------- | ----------- | ----------------------- | ----------- | - | ----------- | ------ | ----------- | - | ------- | ------- | - | - | ------- | ------- | -
|(in thousands, except                 |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|per share amounts)                    |                                       | Thirteen Weeks Ended |             | Thirty-nine Weeks Ended
|                                      |                                       |                      |             |                        
|                                      |                                       |                      | October 28, |                         | October 29, |   | October 28, |        | October 29,
|                                      |                                       |                      | 2001        |                         | 2000        |   | 2001        |        | 2000       
|                                      |                                       |                      |             |                         |             |   |             |        |            
|Sales                                 |                                       | $                    | 103,753     |                         |             | $ | 99,864      |        |             | $ | 288,184 |         |   | $ | 284,033 |        
|                                     
|                                     
|                                     
|                                     
|Cost of goods sold                    |                                       |                      | 51,679      |                         |             |   | 49,337      |        |             |   | 143,968 |         |   |   | 142,055 |        
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|                                      | Gross profit                          |                      |             | 52,074                  |             |   |             | 50,527 |             |   |         | 144,216 |   |   |         | 141,978 |  
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|Expenses (income)                     |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Selling, general and administrative   |                      |             | 44,512                  |             |   |             | 43,814 |             |   |         | 128,348 |   |   |         | 127,053 |  
|                                     
|                                     
|                                     
|                                     
|                                      | Depreciation and amortization         |                      |             | 1,383                   |             |   |             | 1,338  |             |   |         | 4,108   |   |   |         | 3,939   |  
|                                     
|                                     
|                                     
|                                     
|                                      | Interest expense                      |                      |             | 354                     |             |   |             | 614    |             |   |         | 1,168   |   |   |         | 1,994   |  
|                                     
|                                     
|                                     
|                                     
|                                      | Interest income                       |                      |             | (29                     | )           |   |             | (52    | )           |   |         | (94     | ) |   |         | (153    | )
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|                                      | Total operating and interest expenses |                      |             | 46,220                  |             |   |             | 45,714 |             |   |         | 133,530 |   |   |         | 132,833 |  
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|Earnings before taxes                 |                                       |                      | 5,854       |                         |             |   | 4,813       |        |             |   | 10,686  |         |   |   | 9,145   |        
|                                     
|                                     
|                                     
|                                     
|Income taxes                          |                                       |                      | 2,126       |                         |             |   | 1,747       |        |             |   | 3,880   |         |   |   | 3,314   |        
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|Net earnings and comprehensive income |                                       | $                    | 3,728       |                         |             | $ | 3,066       |        |             | $ | 6,806   |         |   | $ | 5,831   |        
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|Earnings per share                    |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Basic                                 |                      | $           | 0.22                    |             |   | $           | 0.19   |             |   | $       | 0.41    |   |   | $       | 0.34    |  
|                                     
|                                     
|                                     
|                                     
|                                      | Diluted                               |                      | $           | 0.22                    |             |   | $           | 0.19   |             |   | $       | 0.40    |   |   | $       | 0.34    |  
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|Weighted average shares outstanding   |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|                                     
|                                     
|                                     
|                                     
|                                      | Basic                                 |                      |             | 16,891                  |             |   |             | 16,448 |             |   |         | 16,676  |   |   |         | 16,943  |  
|                                     
|                                     
|                                     
|                                     
|                                      | Diluted                               |                      |             | 17,298                  |             |   |             | 16,470 |             |   |         | 16,951  |   |   |         | 16,950  |  
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        
|Dividends per share                   |                                       | $                    | 0.04        |                         |             | $ | 0.025       |        |             | $ | 0.12    |         |   | $ | 0.075   |        
|                                      |                                       |                      |             |                         |             |   |             |        |             |   |         |         |   |   |         |        

See accompanying notes to consolidated financial statements.

-4-



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##### Table of Contents






CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

(unaudited)


|                                                                                     |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |        |  
|------------------------------------------------------------------------------------ |  | ------------ | ---------- | ---------- |  | -------- | --- | -------- |  | -------------- | ------ | ------------- |  | ------------ | ------- | ------ |  |  | ----------- | - |  |  | --------- | - |  |  | ------- | - |  | - | ------ | -
|(in thousands, except for                                                            |  | Common Stock |            | Additional |  |          |     |          |  | Treasury Stock |        |               |  |              |         | Total 
|number of shares)                                                                    |  |              |            | Paid-in    |  | Retained |     |          |  | Deferred       |        | Shareholders'
|                                                                                     |  | Shares       |            | Amount     |  | Capital  |     | Earnings |  | Shares         |        | Amount        |  | Compensation |         | Equity
|                                                                                     |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |       
|Thirty-nine weeks ended October 28, 2001                                             |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |  
|                                                                                     |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |        
|Balance January 28, 2001                                                             |  |              | 29,190,335 |            |  | $        | 292 |          |  | $              | 39,094 |               |  | $            | 183,917 |        |  |  | (11,905,738 | ) |  |  | ($135,583 | ) |  |  | ($5,168 | ) |  | $ | 82,552 |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Net earnings                                                                         |  |              |            |            |  |          |     |          |  |                |        |               |  |              | 6,806   |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 6,806  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cash dividend  $.04 per
share on a quarterly basis                                  |  |              |            |            |  |          |     |          |  |                |        |               |  |              | (2,113  | )      |  |  |             |   |  |  |           |   |  |  |         |   |  |   | (2,113 | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Amortization and vesting of deferred
compensation on restricted stock
incentive plan |  |              |            |            |  |          |     |          |  |                | (79    | )             |  |              |         |        |  |  |             |   |  |  |           |   |  |  | 1,495   |   |  |   | 1,416  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of restricted stock                                                         |  |              | 459,100    |            |  |          | 4   |          |  |                | 3,478  |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  | (3,482  | ) |  |   |        |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Cancellation of restricted stock                                                     |  |              | (4,100     | )          |  |          |     |          |  |                | (31    | )             |  |              |         |        |  |  |             |   |  |  |           |   |  |  | 31      |   |  |   |        |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Purchase of treasury stock                                                           |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |        |  |  | (104,350    | ) |  |  | (721      | ) |  |  |         |   |  |   | (721   | )
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Issuance of shares under directors
stock plan                                       |  |              | 16,805     |            |  |          |     |          |  |                | 126    |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 126    |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Exercise of stock options                                                            |  |              | 347,850    |            |  |          | 4   |          |  |                | 2,587  |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 2,591  |  
|                                                                                    
|                                                                                    
|                                                                                    
|                                                                                    
|Stock issuances as compensation for
professional services                            |  |              | 298        |            |  |          |     |          |  |                | 3      |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   | 3      |  
|                                                                                     |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |        |  
|Balance October 28, 2001                                                             |  |              | 30,010,288 |            |  | $        | 300 |          |  | $              | 45,178 |               |  | $            | 188,610 |        |  |  | (12,010,088 | ) |  |  | ($136,304 | ) |  |  | ($7,124 | ) |  | $ | 90,660 |  
|                                                                                     |  |              |            |            |  |          |     |          |  |                |        |               |  |              |         |        |  |  |             |   |  |  |           |   |  |  |         |   |  |   |        |  

See accompanying notes to consolidated financial statements.

-5-



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##### Table of Contents






CONSOLIDATED STATEMENT OF CASH FLOWS

(unaudited)


|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |             |       |         |        |  
|------------------------------------------------ | ---------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------ | --------------------------------------------------- | ------------------------------------------------------------ | ----- | ----------------------- | ------ | ----------- | ----- | ------- | ------ | -
|(in thousands)                                   |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       | Thirty-nine Weeks Ended
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                        
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       | October 28,             |        | October 29,
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       | 2001                    |        | 2000       
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|Cash flows from operating activities:            |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Net earnings                                                                                                           |                                                                          | $                                                   | 6,806                                                        |       |                         | $      | 5,831       |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Adjustments to reconcile net earnings to cash
provided by (used in) operating activities
Depreciation and amortization |                                                                          |                                                     | 4,108                                                        |       |                         |        | 3,939       |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | LIFO                                                                     |                                                     |                                                              | 300   |                         |        |             | 300   |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | Deferred income taxes                                                    |                                                     |                                                              | 943   |                         |        |             | 2,555 |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | Amortization of deferred compensation on
restricted stock incentive plan |                                                     |                                                              | 1,495 |                         |        |             | 1,408 |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Issuance of shares as compensation for professional services |       |                         | 3      |             |       |         | 95     |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | Interest expense on closed store accrual                                 |                                                     |                                                              | 153   |                         |        |             | 196   |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | (Increase) decrease in assets                                            |                                                     |                                                              |       |                         |        |             |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Receivables and prepaid expenses                             |       |                         | (847   | )           |       |         | 2,399  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Inventory at current cost                                    |       |                         | (2,734 | )           |       |         | 1,489  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Pension payment in excess of required contribution           |       |                         | (564   | )           |       |         | (3,078 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Other noncurrent assets                                      |       |                         | 70     |             |       |         | (1,569 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | Increase (decrease) in liabilities                                       |                                                     |                                                              |       |                         |        |             |       |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Accounts payable                                             |       |                         | 2,488  |             |       |         | 3,251  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Accrued liabilities                                          |       |                         | (93    | )           |       |         | 3,841  |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Current income tax obligations                               |       |                         | (4,067 | )           |       |         | (1,491 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Postretirement benefits other than pensions                  |       |                         | 452    |             |       |         | 397    |  
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Payments against closed store accrual                        |       |                         | (1,161 | )           |       |         | (2,151 | )
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        |                                                                          |                                                     | Other liabilities                                            |       |                         | (454   | )           |       |         | 502    |  
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                 |                                                                                                                        |                                                                          | Net cash (used in) provided by operating activities |                                                              |       | 6,898                   |        |             |       | 17,914  |       
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|Cash flows from investing activities:            |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Additions to property and equipment                                                                                    |                                                                          |                                                     | (6,994                                                       | )     |                         |        | (3,224      | )    
|                                                
|                                                
|                                                
|                                                
|                                                 | Other                                                                                                                  |                                                                          |                                                     |                                                              |       |                         |        | 268         |      
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                 |                                                                                                                        |                                                                          | Net cash used in investing activities               |                                                              |       | (6,994                  | )      |             |       | (2,956  | )     
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|Cash flows from financing activities:            |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Net borrowings (repayments) on revolving
credit agreement                                                              |                                                                          |                                                     | 1,000                                                        |       |                         |        | (10,000     | )    
|                                                
|                                                
|                                                
|                                                
|                                                 | Purchase of treasury stock                                                                                             |                                                                          |                                                     | (721                                                         | )     |                         |        | (5,495      | )    
|                                                
|                                                
|                                                
|                                                
|                                                 | Issuance of shares under directors stock plan                                                                         |                                                                          |                                                     | 126                                                          |       |                         |        |             |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Proceeds from exercise of stock options                                                                                |                                                                          |                                                     | 2,591                                                        |       |                         |        |             |      
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash dividends paid                                                                                                    |                                                                          |                                                     | (2,113                                                       | )     |                         |        | (1,332      | )    
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                 |                                                                                                                        |                                                                          | Net cash provided by (used in) financing activities |                                                              |       | 883                     |        |             |       | (16,827 | )     
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|Increase (decrease) in cash and cash equivalents |                                                                                                                        |                                                                          | 787                                                 |                                                              |       |                         | (1,869 | )          
|                                                
|                                                
|                                                
|                                                
|Cash and cash equivalents:                       |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Beginning of period                                                                                                    |                                                                          |                                                     | 3,891                                                        |       |                         |        | 6,904       |      
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                 | End of period                                                                                                          |                                                                          | $                                                   | 4,678                                                        |       |                         | $      | 5,035       |      
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|Supplemental disclosures:                        |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            
|                                                
|                                                
|                                                
|                                                
|                                                 | Cash paid during the period for:                                                                                       |                                                                          |                                                     |                                                              |       |                         |        |             |      
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | Interest                                                                 |                                                     | $                                                            | 887   |                         |        | $           | 1,700 |        
|                                                
|                                                
|                                                
|                                                
|                                                 |                                                                                                                        | Income taxes                                                             |                                                     | $                                                            | 7,450 |                         |        | $           | 1,807 |        
|                                                 |                                                                                                                        |                                                                          |                                                     |                                                              |       |                         |        |            

See accompanying notes to consolidated financial statements.

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##### Table of Contents






NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of Hancock Fabrics,
Inc. (Hancock or the Company) have been prepared in accordance with the
instructions to Form 10-Q and therefore do not include all information and footnotes
necessary for a fair presentation of financial position, results of
operations and cash flows
in conformity with generally accepted accounting principles. The statements do
reflect all adjustments (consisting of only normal recurring entries) which are, in
the opinion of management, necessary for a fair presentation of financial position in
conformity with generally accepted accounting principles. The statements should be read in
conjunction with the Notes to the Consolidated Financial Statements
for the fiscal year ended
January 29, 2001 incorporated into the Companys Annual Report on Form 10-K.

The results of operations for the thirteen and thirty-nine week periods are not
necessarily indicative of the results to be expected for the full fiscal year.

NOTE 2: 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.

COMPUTATION OF EARNINGS PER
SHARE

(unaudited)


|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |            |       | 
|------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------ | ---------------------------- | ---------- | ----------------------- | ------- | ----------- | ---------- | ----------- | ------ | ---- | ---------- | ---------- | ------- | - | ---------- | ---------- | ----- | 
|(dollars in thousands, except for share and                                                             |                                                                    | Thirteen Weeks Ended         |            | Thirty-nine Weeks Ended
|per share amounts)                                                                                      |                                                                    |                              |            |                        
|                                                                                                        |                                                                    | October 28,                  |            | October 29,             |         | October 28, |            | October 29,
|                                                                                                        |                                                                    |                              |            | 2001                    |         | 2000        |            | 2001        |        | 2000
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |            
|Basic earnings per share                                                                                |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Net earnings                                                       |                              | $          | 3,728                   |         |             | $          | 3,066       |        |      | $          | 6,806      |         |   | $          | 5,831      |      
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|                                                                                                        | Weighted average number of common
shares outstanding during period |                              |            | 16,891,489              |         |             |            | 16,448,010  |        |      |            | 16,676,279 |         |   |            | 16,943,034 |      
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|Basic earnings per share (1)                                                                            |                                                                    | $                            | 0.22       |                         |         | $           | 0.19       |             |        | $    | 0.41       |            |         | $ | 0.34       |           
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|Diluted earnings per share                                                                              |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        | Net earnings                                                       |                              | $          | 3,728                   |         |             | $          | 3,066       |        |      | $          | 6,806      |         |   | $          | 5,831      |      
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|                                                                                                        | Weighted average number of common
shares outstanding during period |                              |            | 16,891,489              |         |             |            | 16,448,010  |        |      |            | 16,676,279 |         |   |            | 16,943,034 |      
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                    | Common stock equivalents     |            |                         | 306,145 |             |            |             | 21,686 |      |            |            | 275,004 |   |            |            | 7,462 | 
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                       
|                                                                                                        |                                                                    | Contingently issuable shares |            |                         | 100,052 |             |            |             | 0      |      |            |            | 0       |   |            |            | 0     | 
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|                                                                                                        |                                                                    |                              | 17,297,686 |                         |         |             | 16,469,696 |             |        |      | 16,951,283 |            |         |   | 16,950,496 |           
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|Diluted earnings per share (1)                                                                          |                                                                    | $                            | 0.22       |                         |         | $           | 0.19       |             |        | $    | 0.40       |            |         | $ | 0.34       |           
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           
|Weighted average common stock equivalents
not included in EPS because the effect would
be anti-dilutive |                                                                    |                              | 0          |                         |         |             | 281,987    |             |        |      | 98,335     |            |         |   | 391,408    |           
|                                                                                                        |                                                                    |                              |            |                         |         |             |            |             |        |      |            |            |         |   |            |           



---

|(1) |  | Per share amounts are based on average shares outstanding during each
quarter and may not add to the total for the year.
|--- |  | ------------------------------------------------------------------------------------------------------------------------

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NOTE 3: RESERVE FOR STORE CLOSINGS

Store closing reserves are established based on
estimates of net lease obligations and other store closing costs. During the fourth quarter of 1998, the Company recorded a charge of
$8,604,000 for revised estimates of net
lease obligations for stores closed at January 31, 1999 and stores committed to
be closed in fiscal 1999. This charge, when combined with an already existing reserve, resulted in a
total reserve of $9,022,000 at January 31, 1999.

At October 28, 2001, the balance in this reserve was $3,068,000 which represents
the present value of the future net lease obligations required for
the locations which have been closed. The 2001 activity in the
reserve is as follows:

|                  |                |   |             |  |          |   |          |  |             |  |         |   |  |   |       |  | 
|----------------- | -------------- | - | ----------- |  | -------- | - | -------- |  | ----------- |  | ------- | - |  | - | ----- |  | 
|                  |                |   | January 29, |  | Imputed  |   | Lease    |  | October 28,
|                  |                |   | 2001        |  | Interest |   | Payments |  | 2001       
|                  |                |   |             |  |          |   |          |  |            
|Lease obligations |                | $ | 4,076       |  |          | $ | 153      |  |             |  | ($1,161 | ) |  | $ | 3,068 | 
|                 
|                 
|                 
|                 
|                  | (in thousands) |   |             |  |          |   |          |  |             |  |         |   |  |   |       |  | 

NOTE 4: RECENT ACCOUNTING PRONOUNCEMENTS

On June 29, 2001, the Financial Accounting Standards Board issued Statement No.
141 (SFAS 141), Business Combinations. SFAS 141 requires the use of the purchase method
of accounting for all business combinations.
It also provides new criteria for determining whether intangible assets acquired
in a business combination should be recognized separately from goodwill. SFAS 141 is effective for all business
combinations (as defined) initiated after June 30, 2001 and for all business combinations accounted for by
the purchase method that are completed after June 30, 2001. The Company adopted SFAS 141 in
the quarter ended July 29, 2001 and there
was no impact upon the Companys financial statements.

On June 29, 2001, the Financial Accounting Standards Board also issued Statement
No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 primarily
addresses the accounting for goodwill and
intangible assets subsequent to their acquisition and supersedes APB
17, Intangible Assets. SFAS 142
requires that goodwill and indefinite lived intangible assets be
tested for impairment at least annually at the
reporting unit level and ceases the amortization of such assets. SFAS
142 allows
the amortization period of intangible assets with finite lives to be in excess of forty years. SFAS 142 is
effective for fiscal years beginning after December 15, 2001 to all goodwill and other intangible assets recorded by
the Company at that date, regardless of when those assets were initially recognized. Management
has not yet evaluated the impact the
adoption of SFAS 142 will have upon the Companys financial statements.

The Financial Accounting Standards Board recently
issued Statement No. 144 (SFAS 144),
Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS 144 supersedes FAS 121
and applies to all long-lived assets (including discontinued
operations). SFAS 144 requires that long-lived assets that are to be
disposed of by sale be measured at the lower of book value or fair value less cost
to sell. SFAS 144 is effective for fiscal years beginning after December 15, 2001 and, generally, its provisions
are to be applied prospectively. Management
has not yet evaluated the impact of the adoption of SFAS 144 will
have upon the Company's financial statements.




ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

FINANCIAL CONDITION

Historically, cash flow from operations has been
sufficient to finance the expansion and operation of Hancocks
business. Hancocks principal capital requirements are for the financing of
inventories and to a lesser extent for capital expenditures relating to store
locations and its warehouse and distributions facility. Funds for such

-8-



---



##### Table of Contents



purposes are generated from Hancocks operations and, if necessary, supplemented
by borrowings from commercial lenders. In addition to cash dividends, Hancock
has historically used excess cash and, if necessary, borrowings from commercial
lenders to purchase treasury stock as market and financial conditions dictate.
Hancock opened 8 stores and closed 7 stores during the thirteen weeks ended
October 28, 2001, resulting in a total of 437 stores at period end.

During the thirty-nine weeks ended October 28, 2001, net earnings of $6.8
million and an increase of $2.5 million in accounts payable were used to fund
additions to property and equipment of $7.0 million, an increase of $2.6 million
in inventory and the payment of income tax obligations of $4.1 million. At
October 28, 2001, the Company had $17 million in outstanding debt, or about 16%
of total capitalization, compared to $21 million in outstanding debt at the end
of last years third quarter.

RESULTS OF OPERATIONS

Thirteen weeks ended October 28, 2001 compared to thirteen weeks ended October
29, 2000

Net earnings were $3.7 million, or $.22 per diluted share, compared with $3.1
million, or $.19 per diluted share in the same period of the prior year.
Earnings were influenced by higher sales and lower expenses as a percentage of
sales than last year.

Sales increased to $103.8 million from $99.9 million in last years third
quarter, as the result of an increase of 5.7% in comparable store sales, offset
by a $1.5 million decrease in sales from net store opening and closing activity.
Sales benefited from the aggressive store remodeling and product mix changes
that the Company has implemented, but were partially offset by having ten fewer
stores than a year ago. Gross margins declined slightly to 50.2% from 50.6% last
year.

In the third quarter of 2001, total selling, general and administrative expenses
as a percentage of sales were 42.9% compared to 43.9% in 2000 due to expense
leverage from comparable store sales increases and continued efficiencies gained
in advertising expenditures.

Interest expense was lower due to a decrease in interest rates by the Federal
Reserve Bank and a decline in the average outstanding debt.

Thirty-nine weeks ended October 28, 2001 compared to thirty-nine weeks October
29, 2000

Net earnings were $6.8 million or $.40 per diluted share, compared with $5.8
million, or $.34 per diluted share in the same period of the prior year. The
increase in earnings resulted from higher sales margins and lower expenses as a
percentage of sales.

Sales increased to $288.1 million from $284.0 million in the first thirty-nine
weeks of last year, as the result of an increase of 3.1% in comparable store
sales, offset by a $4.2 million decrease in sales from net store opening and
closing activity. Sales benefited from the aggressive store remodeling and
product mix changes that the Company has implemented, but were offset by having
fewer stores than a year ago. Gross margins were 50.0% for the thirty-nine week
period for both the current and previous year.

For the thirty-nine week period, total selling, general and administrative
expenses as a percentage of sales decreased to 44.5% from 44.7% due to expense
leverage from comparable store sales increase and continued efficiencies gained
in advertising expenditures.

Interest expense was lower due to a decrease in interest rates by the Federal
Reserve Bank and a reduction in the average outstanding debt level.

-9-



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##### Table of Contents



EFFECTS OF INFLATION

The impact of inflation on labor and occupancy costs can significantly affect
Hancocks operations. Many of Hancocks employees are paid hourly rates related
to the Federal minimum wage; accordingly, any increases will affect Hancock. In
addition, payroll taxes, employee benefits and other employee related costs
continue to increase. Costs of leases for new store locations remain stable, but
renewal costs of older leases continue to increase. Taxes, maintenance and
insurance costs have also risen. 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 is the most effective tool for coping with increasing costs and
expenses.

Inflation is one of the key factors used in the calculation of the LIFO charge
to Cost of Sales. In the last four fiscal quarters, an increase in the PPI
indices resulted in a LIFO charge of $650 thousand.

SEASONALITY

The Companys business is slightly seasonal. Peak sales periods occur in the
fall and pre-Easter weeks, while the lowest sales periods occur during the
summer and the month of January.

RECENT ACCOUNTING PRONOUNCEMENTS

On June 29, 2001, the Financial Accounting Standards Board issued Statement No.
141 (SFAS 141), Business Combinations. SFAS 141 requires the use of the
purchase method of accounting for all business combinations. It also provides
new criteria for determining whether intangible assets acquired in a business
combination should be recognized separately from goodwill. SFAS 141 is effective
for all business combinations (as defined) initiated after June 30, 2001 and for
all business combinations accounted for by the purchase method that are
completed after June 30, 2001. The Company adopted SFAS 141 in the quarter ended
July 29, 2001 and there was no impact upon the Companys financial statements.

On June 29, 2001, the Financial Accounting Standards Board also issued Statement
No. 142 (SFAS 142), Goodwill and Other Intangible Assets. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
acquisition and supersedes APB 17, Intangible Assets. SFAS 142 requires that
goodwill and indefinite lived intangible assets be tested for impairment at
least annually at the reporting unit level and ceases the amortization of such
assets. SFAS 142 allows the amortization period of intangible assets with finite
lives to be in excess of forty years. SFAS 142 is effective for fiscal years
beginning after December 15, 2001 to all goodwill and other intangible assets
recorded by the Company at that date, regardless of when those assets were
initially recognized. Management has not yet evaluated the impact the adoption
of SFAS 142 will have upon the Companys financial statements.

The Financial Accounting Standards Board recently issued Statement No. 144
(SFAS 144), Accounting for the Impairment or Disposal of Long-Lived Assets.
SFAS 144 supersedes FAS 121 and applies to all long-lived assets (including
discontinued operations). SFAS 144 requires that long-lived assets that are to
be disposed of by sale be measured at the lower of book value or fair value less
cost to sell. SFAS 144 is effective for fiscal years beginning after December
15, 2001 and, generally, its provisions are to be applied prospectively.
Management has not yet evaluated the impact of the adoption of SFAS 144 will
have upon the Companys financial statements.

-10-



---



##### Table of Contents



FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor
for certain qualifying forward-looking statements. Certain information included in
this Form 10-Q contains statements that are forward-looking, such as statements
related to financial items and results, plans for future expansion, store
closure and other business development activities, capital spending or financing
sources, capital structure, stability of interest rates during periods of
borrowings and the effects of regulation, general economic trends, changes in
consumer demand or purchase patterns, delays or interruptions in the flow of
merchandise between the Companys suppliers and/or its distribution center and
its stores, a disruption in the Companys data processing services and
competition. Such forward-looking information involves important risks and
uncertainties that could significantly impact anticipated results in the future.
Accordingly, such results may differ materially from those expressed in any
forward-looking statements by or on behalf of Hancock. These risks and
uncertainties include, but are not limited to, those described above.




PART II. OTHER INFORMATION:




Item 3: Quantitative and Qualitative Disclosures about Market Risks

The Company is not holding any derivative financial or commodity instruments at
October 28, 2001. The Company is exposed to financial market risks, including
changes in interest rates. All borrowings under the Companys Revolving Credit
Agreement bear interest at a negotiated rate, a floating rate (the higher of the
federal funds rate plus 1/2% or the prime rate), a rate derived from the Money
Market Rate, or a rate derived from the London Interbank Offered Rate. An
increase in interest rates of 100 basis points would not significantly affect the
Companys income. All of the Companys business is transacted in U. S. dollars
and, accordingly, foreign exchange rate fluctuations have never had a
significant impact on the Company, and they are not expected to in the
foreseeable future.




Item 6. Exhibits and Reports on Form 8-K

(b)  Reports on Form 8-K

None




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/ Bruce D. SmithBruce D. Smith
Senior Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

December 12, 2001

-11-