Creative Leisure News - "Benny da Buyer"

A view of the industry through the eyes of a chain buyer.

CLN Newsbriefs

May 8 - June 2, 2006.

by Mike Hartnett (June 5, 2006)

MAY SALES FIGURES

Jo-Ann's reported today that overall sales for the month decreased 4.2% to $109.8 million and the same-store sales figure was worse: sales in stores open more than a year dropped 7.6%. Year-to-date, net sales decreased 0.1% to $534.5 million and same-store sales were down 4.7%.

The situation was much better for Hancock. Overall May sales rose 5.4% and same-store sales increased 5.9%, the first positive numbers in recent months.

Michaels and A.C. Moore report sales on a quarterly basis rather than by month.

Wal-Mart had a tough month � for Wal-Mart. Same-store sales in the U.S. rose only 2.0%. "Fuel prices continue to be a top concern for our customers," said Wal-Mart Exec VP/CFO Tom Schoewe. Wal-Mart predicted same-store sales in June would grow only 1%-3%. Meanwhile, Target's same-store sales rose 5.7%.

A sampling of other stores same-store sales: J.C. Penney, +11.1% ... Duckwall-ALCO, +8.8% ... Norstrom, +7.8% ... Family Dollar, +4.5% ... Pier 1, -6.6%.

JO-ANN'S RESPONDS TO RUMORS

While some investment companies are circling around Michaels, others are quietly buying substantial chunks of Jo-Ann's stock. According to filings with the Securities and Exchange Commission, this month Reed Conner & Birdwell of Los Angeles and Tennenbaum Capital Partners of Santa Monica have purchased millions of shares, although not a majority.

Meanwhile, CNBC reportedly announced that Jo-Ann's was up for sale, and StreetInsider, a business news website, reported analysts are saying JoAnn's has hired Lehman Bros. to look at strategic options. Both reports predicted the most likely buyer will be a private equity firm such as those looking at Michaels.

Chair/CEO Alan Rosskamm told CLN: "We don't comment on rumors of this kind, but I can tell what we said to the financial community on our earnings call on May 15. Trading volume has been high with a number of new investors accumulating substantial positions. Public (13D) filings occurred in December and again this month, and in January we began working with a financial advisor to provide ongoing counsel during this period of volatility.

"I am focused on our business repair plan," Rosskamm added, "and feel we are making real progress. Although we've indicated that results in the first half will be difficult, we except to show improved results in the second half of the year. We are ahead of schedule on our efforts to liquidate unproductive inventory, and expect to achieve significant debt reduction by year end."

MICHAELS: A PROFITABLE FIRST QUARTER

For the quarter ended Apr. 29, net income was $50.6 million ($0.38/diluted share), which met Wall Street estimates. A year ago, the company reported a loss of $35.9 million (-$0.26), which included the cumulative effect of accounting changes.

As CLN previously reported, sales rose 1.4% to $832.5 million, but same-store sales decreased 3.0%, on a 1.6% increase in average ticket, a 5.0% decrease in transactions, and a 0.4% increase in custom frame deliveries. A favorable Canadian currency translation added approximately 0.4% to the average ticket increase for the quarter. Declining yarn sales (38% from a year ago) and 15 merchandise plan-o-gram resets compared to none the previous year were cited as the culprits. Clearance and discontinued inventory per store was approximately 19% below year-ago levels.

The Southeast, Southwest, and Pacific zones were the strongest; the top categories were General Crafts (primarily Jewelry and Beads), Custom Floral, Apparel Crafts, and Kids Crafts.

Margins improved approximately 30 basis points due to higher margin rates for regular and promotional sales, improved sourcing, and a higher percentage of merchandise sold at regular prices. There was more inventory shrinkage as a percent of sales, however.

Average inventory/store, including distribution centers, dropped 9.7% to $821,000 due to an accelerated markdown program and the liquidation of some fashion yarn inventory.

Execs expect same-store sales for the second quarter to increase 1%-3%, with total sales increasing 5%-7% and operating income to remain flat versus last year. The income forecast includes $3.8 million for store remodeling expenses and $4.6 million related to the company's review of strategic alternatives, but earnings/share are estimated to be $0.19-$0.21, a 58%-75% increase over the prior year.

The company opened 17, relocated three, and closed three Michaels stores, and closed one Aaron Brothers store. For the year, look for Michaels to open 40-45 new stores, relocate and/or expand approximately 20 stores, remodel 70 stores, and continue construction of the Centralia, WA distribution center. As of May 24, the store count is 899 Michaels stores, 165 Aaron Brothers stores, 11 Recollections stores, and four Star Decorators wholesale operations.

HDA & MICHAELS: FACTS & RUMORS

As CLN reported this morning, Home Design Alternatives (HDA) is taking over the distribution of books and magazines in Michaels stores. The change has caused a great deal of consternation and confusion on the part of various publishers. In response to numerous emails and phone calls by publishers to CLN, we talked to key Michaels execs this morning. Some highlights:

1. Michaels has been dissatisfied with its book sales for years and decided to make major changes. Execs analyzed five distributors, then three, and finally chose HDA. Together, the companies devised "an aggressive plan to drive sales," said Co-President Greg Sandfort.

Sandfort pointed out that the current store position for hardcover books and magazines was self-defeating; consumers didn't really see them until after they had checked out. Instead, some magazines will be merchandised in checkout racks, and books and magazines will be displayed in a new island fixture which will sit in the main drive aisle in most stores.

2. Michaels is NOT de-emphasizing leaflets nor moving all print media to one "library." However, if Michaels decides to reduce the size of a particular department, the number of adjacent supporting books will be reduced accordingly.

3. Regarding terms between HDA and publishers, Michaels execs believe that Robinson-Patman lawsuits in the publishing industry require that the terms have to be consistent across all segments.

One remaining question regards the books currently in Michaels. One publisher told CLN, "[HDA]'s insisting we take back our books that are currently in Michaels, even though we (a) didn�t sell them to Michaels; (b) have no such agreement with Michaels or HDA; and (c) have a no-return agreement with Leisure [Arts], who sold the books to Michaels in the first place."

Michaels officials believe this can be resolved with improved communication and suggested publishers contact Michaels if necessary. All in all, they are enthusiastic about the changes. "This should improve sales immeasurably," said Susan Venbenten.

JO-ANN'S REPORTS LOSS

Jo-Ann's reported a net loss for the first quarter ended Apr. 29 of $6.6 million ($0.28/diluted share). A year ago the company reported a net income of $4.2 million ($0.18). According to MarketWatch, analysts polled by Thomson First Call had expected a per-share loss of 33 cents. The cumulative effect of an accounting change increased earnings by $1.0 million ($0.04).

Sales increased 1.0% to $424.7 million but same-store sales decreased 3.9%. The effort to sell excess and discontinued inventory hurt gross margins, which decreased from 48.7% to 46.6% of net sales. Selling, general and administrative expenses increased to 44.7% of sales from 42.9% due to the lack of leverage resulting from the same-store sales performance, logistics costs related to the opening of the Opelika distribution center, and increases in operating expenses, primarily driven by increases in store fixed expenses and advertising, resulting from the larger number of superstores.

Chair/CEO Alan Rosskamm said, "As expected, our sales growth and gross margin rate remain challenged as we execute on our repair plan against a backdrop of soft industry conditions with lower customer demand. Although not evident in the numbers, we continue to make progress on our key repair plan initiatives, particularly in the areas of inventory reduction and expense control, as we implement better disciplines, which we expect will benefit our results as we progress through the year.

"Our new Opelika, AL distribution center now serves approximately 170 of our stores," Rosskamm added, "and we expect it to enhance the performance of our logistics network. Also, we are making substantial progress on our merchandise assortment project. This project should be completed by the beginning of the third quarter and will bring new, fresh merchandise to our stores which should help drive the business improvement we expect in the second half of fiscal 2007. I am confident that we are focused on the correct initiatives, which I expect will enable us to end the year as a more disciplined organization with a much stronger balance sheet and a significantly reduced debt balance."

(Note: To read previous "Benny" entries, click on the headlines in the right-hand column. To comment on any industry issue, email CLN at mike@clnonline.com.)

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