How to Detect Business Bankruptcy: Hancock Fabrics Case Study

Hancock Fabrics' Business Bankruptcy

As any savvy shopper knows, a good seamstress or tailor can work wonders with even a basic pattern. But while an expert can make a poor fit better if the starting point is good, sometimes the problem is beyond repair.

Business isn’t so different. When key financial numbers don’t line up, the right combination of strategy and management can sometimes alter the company’s course. But when problems persist quarter after quarter, bankruptcy is likely. To recognize the early warning signs, you simply need to know how to read the patterns.

Financial Distress in Retail

Hancock Fabrics, a retailer that offered fashion and home decorating textiles, sewing accessories, needlecraft supplies, and sewing machines, filed for bankruptcy in February 2016. At the time, the company operated 263 stores in 37 states, plus an Internet store. Yet to the trained eye, bankruptcy came as no surprise.

Like other retailers, Hancock faced an uphill battle. As this McKinsey report explains, many brick and mortar retailers struggle to compete with online shopping. Now that “the world’s largest store [is] in every pocket,” specialty retailers such as Radio Shack, Sports Authority and Hancock Fabrics have closed their doors. Retail bankruptcy risk was +128% compared to before the last financial crisis, at the time of Hancock Fabrics’ failure.

Early Signs of Business Bankruptcy

Every company has some exposure to financially stressed customers or suppliers. Yet many financial professionals still rely on misleading data to evaluate financial stress and the creditworthiness of public company customers and suppliers.

Accepted wisdom would have you track payment history, but research shows that’s unreliable. Public companies tend to make consistent payments right up to the point of business bankruptcy. And other common indicators only tell part of the story. For instance, the Altman Z”-score failed to predict Hancock’s fall, and the DBT Index barely budged.

But if you’d been looking at these critical signs, you would have seen trouble coming:

  • FRISK® score in free fall, deeper in the “red zone”
  • Market capitalization down 97% in just one year, a major red flag
  • Operating margins and free cash flow consistently in the red

Hancock Fabrics displayed them all, plus more.

Lessons Learned

Hancock’s impending bankruptcy was clear to those who knew how to read the patterns. Still, keeping up with a barrage of new information as financial conditions deteriorate is a challenge.

Sometimes events leading up to a bankruptcy unfold slowly, while other times financial deterioration is more rapid, unraveling in a matter of months. Hancock had been struggling for years, but serious distress became even more apparent when the FRISK® score fell to a “2” – well below its industry average and its own 11-month average – in November of 2015.

FRISK® Stress Index

From a business standpoint, you need a timely warning of risk that is not too early, and not too late, to maximize sales while preventing loss. But, when your customer can no longer generate enough cash from operations and liquidity suffers, it’s time to act.

By using the right tools and processes, you can detect increasing financial stress and manage your financial risks in time to prevent loss.

Learn to recognize the patterns that signal impending bankruptcy. Read the complete Hancock Fabrics case study now, and view our complete library of case studies!

About CreditRiskMonitor

CreditRiskMonitor is a financial news and analysis service designed to help professionals stay ahead of public company risk quickly, accurately and cost-effectively. More than 35% of the Fortune 1000, plus thousands more worldwide, rely on our commercial credit reporting and predictive risk analytics for assessing the financial stability of over 58,000 global public companies.

At the core of CreditRiskMonitor’s service is its 96% accurate FRISK® score, which is formulated to predict public company bankruptcy risk. One of four key components calculated in the FRISK® score is crowdsourced subscriber activity. This unique system tracks subscribers' patterns of research activity, capturing and aggregating the real-time concerns of what are essentially the key gatekeepers of corporate credit. Other features of CreditRiskMonitor’s service include timely news alerts, the Altman Z” score, agency ratings, financial ratios and trends. CreditRiskMonitor’s network of trade contributors provides more than $135 billion in trade data on their counterparties every month, giving them visibility into their biggest dollar risks.