Hancock Fabrics Announces Strategic Restructuring Initiatives and Delay in Reporting 2005 Results

Hancock Fabrics, Inc. (NYSE: HKF), today announced
several strategic restructuring initiatives designed to improve the
Company's performance, together with updates on certain other
financial and accounting issues. Additionally, the Company announced
that it will re-inventory all stores prior to finalizing results for
its year ending January 28, 2006. This will delay the reporting of
year end results and possibly delay the filing of the Company's Annual
Report on Form 10-K beyond its due date of April 13, 2006.

   Strategic Restructuring Initiatives:

   Store Closings

   Management's most recent review of store performance has resulted
in a decision to close approximately 50 stores in 2006, representing
$32 million in annualized sales and approximately $3 million in
operating losses. Many of these stores have lease commitments that
extend past 2006, and it is expected that the continuing occupancy
costs for periods beyond the projected closing dates will total $8
million over a number of future years. As these stores are closed,
charges to earnings will be recorded to the extent that the $8 million
of continuing occupancy costs exceed amounts estimated to be
recoverable through subleasing the properties or early termination of
the leases. Hancock will be engaging a national firm to assist the
Company in the process of marketing these properties and/or
negotiating with landlords for early terminations, in an attempt to
maximize recoveries.
   The inventory in the stores identified for closing will be
liquidated through major sale events in the weeks preceding the
closings. In all likelihood, there will be losses incurred as a result
of liquidation pricing during this process that will be recorded as
incurred. In addition, there are long-lived assets associated with
these stores, totaling $2 million, which will be reviewed for
impairment as part of the year-end closing process for 2005. It is
probable that a substantial portion of these assets will be determined
to be impaired, requiring a non-cash charge, since their future cash
flows will not be expected to be adequate to recover the carrying
amount of the assets.

   Store Operations Realignment

   Reflecting the planned reduction in number of stores and to
leverage its recent investments in merchandising technology, the
Company will reduce its number of operating districts from 47 to 36
and its regions from five to three. The elimination of these thirteen
district and/or regional management positions is expected to reduce
expenses by approximately $1.1 million on an annualized basis.
Severance costs associated with this decision approximate $700,000 and
will be accrued in the fourth quarter of 2005.

   Re-Inventory of Stores:

   Recent store physical inventory counts resulted in exceptions at a
rate higher than were deemed acceptable. The exceptions found were
both positive and negative. Accordingly, the Company is undertaking a
complete physical inventory of all stores to confirm an accurate count
of inventory. The Company is now in the process of planning the
inventory schedule and estimates that it will take six to ten weeks to
complete the re-inventory process, which could cause the Company to
delay filing its Form 10-K by the SEC's deadline. The cost of
completing this project will be significant, $2-$3 million, and
although some of this expense will represent just an acceleration of
inventory costs into February and March that would have been otherwise
incurred in connection with inventory count rotations later in 2006,
there will be a meaningful portion of the cost that will be
incremental.
   In commenting on these announcements, Jane Aggers, Chief Executive
Officer, said, "The decisions to close underperforming stores and
realign our operations management were difficult for us because of the
effect on our associates. However, these are steps we must take to
right-size our expense structure and improve our asset productivity.
We also expect that the decision to re-inventory our entire store
base, while certainly ill-timed from a financial reporting
perspective, will achieve a very positive result by putting Hancock on
the road to a perpetual inventory system enabling more informed
merchandising decisions."

   Update on Accounting and Other Issues:

   Sale of Real Estate

   Two store sale/leaseback transactions and the sale of the
Company's former distribution center have been completed since the end
of the third quarter, yielding cash proceeds totaling approximately $7
million. Four smaller buildings near the former distribution center
and one other store property remain to be sold which, if executed,
could raise as much as $4 million in 2006.

   Debt

   Reflecting the cash generated by the real estate transactions, the
normal sell-down of merchandise in the fourth quarter and a tightening
of merchandise purchases, Hancock's debt under its $110 million credit
facility has been reduced from $62 million at the end of the third
quarter to $51 million today. As computed in accordance with the
credit facility, the Company now has $33 million of excess borrowing
availability.

   Asset Impairment

   As with the aforementioned store closing analysis, reviews for
potential impairment of long-lived assets will likely affect a greater
number of stores this year, including stores that are not scheduled
for closing. The impairment review will be performed as part of the
year end closing process and any such impairment will result in a
non-cash charge to earnings in 2005.

   Pension Liability

   As discussed in the third quarter Form 10-Q, the Company's pension
plan funded status continues to be adequate under the guidelines of
ERISA and, therefore, no cash contribution to the plan is required in
2005. However, accounting rules dictate that a liability is recorded
when the actuarially computed benefit obligations exceed the fair
value of the plan's assets, as is the case with the Company's plan.
Such a liability is recorded as a non-cash reduction in shareholders'
equity, not as an expense in the Statement of Operations.
   Management is finalizing work to quantify the required non-cash
charge to equity. Based on currently available information, it is
expected that the Company's pension asset of $12 million will be
written off and a long-term liability of $7 million will be recorded,
with a corresponding reduction in equity of $19 million. If it is
determined under SFAS No. 109, "Accounting For Income Taxes", that it
is more likely than not that a tax benefit will ultimately be utilized
by the Company in future years for the amount of this charge, the
equity charge will be reduced by $7 million.
   Had Hancock elected to make a $7 million voluntary cash
contribution to the plan, no charge to equity would have been
required; however, management elected not to make such a contribution
because significant cash contributions in past years - most recently,
$17 million in 2002 - have increased the funded status to $65 million
which is considered to be fully funded under ERISA's guidelines.
During 2004, the Company took steps to reduce the need for future
contributions to the pension plan by transitioning employees under the
age of 40 into a 401(k) plan and giving employees over the age of 40
the choice of staying in the pension plan or converting to the 401(k)
plan. Full-time employees hired after December 31, 2004 are eligible
for the 401(k) plan, but not the pension plan.
   Hancock Fabrics, Inc. is a specialty retailer serving the creative
enthusiast with a wide selection of fabric and related home sewing and
decorating accessories. The Company operates 443 retail fabric stores
in 43 states and operates an internet store under the domain name,
www.hancockfabrics.com.
   Comments in this news release that are not historical facts are
forward-looking statements that involve risks and uncertainties which
could cause actual results to differ materially from projections.
These risks and uncertainties include, but are not limited to, general
economic trends, adverse discounting actions taken by competitors,
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, tightening of
purchase terms by suppliers and their factors, a disruption in the
Company's data processing services and other contingencies discussed
in the Company's Securities and Exchange Commission filings. Hancock
undertakes no obligation to release revisions to these forward-looking
statements to reflect events or circumstances after the date hereof or
to reflect the occurrence of unforeseen events, except as required to
be reported under the rules and regulations of the Securities and
Exchange Commission.