Date: March 21, 2005
Vol. IX, No. 6

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TABLE OF CONTENTS

COMMENTARY: Thoughts on Michaels Plans 

In the next couple of years, the U.S. will contain just about all the Michaels stores as we know them today. But the company can't go to stockholders and say, "Well, we're all filled up!" So they have two options: try other formats and increase the sales/profits from existing stores.

Clearly, the company is working on both options. In previous teleconferences, CEO Michael Rouleau talked about raising the sales per store to $5 million. That's what he called the "perfect store."

Regarding other options, the company is working on the Aaron Brothers concept, introduced the ReCollections scrapbook stores, started the Star Wholesale operation, and launched Village Crafts – smaller "Michaels" stores in areas with too small a population to support a traditional Michaels.

Keep in mind that Rouleau is a strong believer that you don't go forward with a concept until you have it perfected, or as perfected as possible. With that in mind, let's consider Michaels new-format efforts.

1. Clearly, the company doesn't believe it has yet perfected the ReCollections concept or it would be planning to roll out more than three stores this year.

2. In his most recent conference call, Rouleau said Aaron Bros. will not be adding numerous stores until the right model is in place.

3. The Star Wholesale concept seems to be successful, but has a limited potential. Each Star clearly needs a large population, so as the concept is now, there's probably a maximum of 50 or so areas than can support it.

4. The Village Crafts concept doesn't seem to have worked. The stores quietly changed their names to Michaels and there's no longer any talk about expanding the concept.

Designing Perspectives. There's growing evidence that the modern consumer wants much more than "cute" designs. (See article, below.) More thoughts on what this means.

Vinny Da Vendor. A vendor asks, "Are our trade shows reflecting the state of the industry? And if so, what kind of shape are we in?"

Tech Topics. How traditional scrapbook vendors can boost sales to scrappers who have gone digital.

Note. If you surf to a column and it's an "old" column, click the "Refresh" or "Reload" button of your browser.

Retailers: The CHA summer show is in Chicago in July, the Memory Trends show is in Las Vegas in October, and the CHA winter show moves to Las Vegas in January. Which shows are you planning to attend?

Vendors: At which of these shows are you planning to exhibit?

To vote, click on Industry Polls in the right-hand column or click HERE.

Now that the winter show season is over, retailers and vendors predicted how the year will go. More than half of the retailers, 56%, predict 2005 will be like 2004. An equal number, 11%, thought profits would increase 1-10% as thought profits would drop 1-10%. More than 22% thought profits would increase more than 10%, while no retailers expect sales to drop that much.

Some vendors were more optimistic. Twenty-six percent expect the year to be similar to 2004, while as many, 22%, expect profits to increase 1-10% as decrease 1-10%. But a little more than a quarter of the respondents expect profits to increase more than 10%, while 4% think profits will drop 10% or more.

There's a new trend emerging in craft design and it's not cute. It's fueled by a younger demographic, consumers looking to express their individuality rather than following preset rules, and they prefer a more sophisticated look. In other words, no smiling bunnies. Examples:

1. Two craft stores that are appealing directly to this new demographic are the Spark Crafts Café in suburban Boston (www.sparkcrafts.com) and Urban Arts + Crafts in Kansas City (http://urbanartsandcrafts.com).

2. Craftster (www.craftster.org). The site says, "Craftster is a forum for people who love to make things but who are not inspired by scrapbooking with die-cut teddy bears, cross-stitched home-sweet-home plaques, wooden boxes with ducks in bonnets painted on...."

3. Scrapbooking may be catching on, too. SOHO Publishing put out a call for "edgy and unconventional" layouts for a book, Scrap and the City ("for the thousands of stylish city-dwelling and hip country-living women who are turned off by scrapbooking’s good girl reputation"). For info, call Paul Gambino at 917-916-0521 or email gambinopaul@aol.com ... Darcy Miller, the editorial director of Martha Stewart Weddings, has published Our Wedding Scrapbook. "Aesthetically, what Miller does has little to do with the current scrapbooking trends and the kitsch-heavy industry it has spawned," wrote W magazine.

4. Get Crafty (www.getcrafty.com.) For insight on this new type of crafter, click on "Jean's Manifesto."

5. The Mar. 7 edition of Time, reported in CLN's previous issue, also gives a good analysis of the trend. Visit www.time.com and type Pretty Crafty in the search engine.)

6. Media. A new HGTV series, Crafters Coast to Coast, (www.hgtv.com/hgtv/shows_hcc2c) premiered recently and features a wide variety of non-cute projects. "Rather than bring artisans into our studio to share their ideas for viewers to try at home, we visit their homes and studios-wherever they may be. The result is a show that goes beyond "how-to" as we see how these crafters' personalities, lives, and communities influence their work." The projects are described as "cool," "hip," and "unique." (The series is aired almost daily at a variety of times. Check your local listings.) Notice the number of quick camera shots; it's crafts for the MTV generation.

(Note: HGTV is looking for designers to appear on the series. Email a recent picture of yourself smiling, images of your projects, contact info, location, and short bio to CoastToCoast@wellergrossman.com.)

This trend is having its effect on almost every product category. The yarn companies spurred the incredible resurgence of knitting and crochet by introducing new, stylish designs, but the changing demographics are affecting other categories, too.

Michelle Temares, one of the industry's best and most thoughtful designers, says, "I believe that this turn to individuality and self expression has been a significant contributing factor to the decline of craft categories such as counted cross stitch and decorative painting and the growth of categories such as scrapbooking and altered art. The former value and emphasize rote sameness while the latter recognize, encourage, and structurally support individual creativity and expression.

"Industry players who can recognize, synthesize, and decode these attitudes and trends will have the advantage in capturing new market share."

(Note: To read more on the subject, click on Designing Perspectives in the left-hand column or click HERE.)

Approximately 730,000 1.75-ounce balls of Fur Out yarn in 17 colors have been voluntarily recalled because the yarn is flammable, said the U.S. Consumer Product Safety Commission. The Turkish-made line has been sold in the U.S. and Canadian since April for $4-$6 a skein.

Bernat recalled the line after receiving two reports of garments made of the yarn burning, with one person receiving singed eyebrows. Consumers should contact Bernat at 800-641-5634 or visit www.bernat.com.

Net income for the year increased 15.2% to $46.2 million ($2.02/diluted share). Net sales for fiscal 2005 increased 4.5% to $1.812 billion and same-store sales rose 3.2%. Debt levels were reduced by $76 million. Results include the costs of debt repurchase and share reclassification expenses which reduced pre-tax income by $4.2 million.

Net income for the fourth quarter increased 21.3% to $32.4 million. Sales rose 6.4% to $588.2 million and same-store sales were up 4.3%. Operating profit was $54.7 million, or 9.3% of sales; gross margins increased to 45.4% of sales from 43.9% due primarily to a less promotional pricing strategy and better sell-through on seasonal goods, offset in part by higher ad and distribution costs.

A pleased Chair/CEO Alan Rosskamm noted that the company finished the year with its debt level reduced by $76 million and that the first 14 stores in the new, 35,000 sq. ft. format had met their financial goals.

Execs think same-store sales will rise 2-3% this year, and earnings/share should grow 6-10% to $2.14-$2.22. They plan to open approximately 40 superstores and close approximately 50 traditional stores, with the resulting growth of overall square footage of 4-5%. "... with the accomplishments we have made this past year," Rosskamm said, "and [with] the experience we will gain in the 40 superstores we will open this year, we should be able to deliver continued earnings growth, while preparing for a more aggressive program of superstore conversions in the year to follow."

This past year, the company opened 29 superstores and two traditional stores and closed 72 traditional stores. The year-end store count: 737 traditional stores and 114 superstores.

Net income for the year slipped 3% to $16.8 million ($0.84/fully diluted share). It was reduced by $3.4 million ($0.17) due to the accounting change for cooperative advertising. Excluding the accounting change, income would have risen 19%. Sales for the year rose 14.7% to a record $497.6 million and same-store sales grew 4%. The company opened 15 stores during the year.

For the fourth quarter, earnings were $14.4 million ($0.72), the same as the previous year. It was reduced by $0.05 due to the accounting change. Sales rose 18.4% to $177.3 million and same-store sales rose 5.6%.

CEO Jack Parker noted the improvements in the distribution system this past year. "Now we are in a great position to concentrate on growing our business for the future."

Execs expect a) to open 15 stores and relocate one; b) same-store sales to grow 3-5% and overall sales to rise 17-19%; and c) earnings/share to grow 27-32% to $1.06-$1.09.

Further to your item about craft basics: I am most concerned about the number of basic craft lines that have been deleted by our suppliers.

On more than one occasion during CHA we placed an order for a "staple" (to us, anyway) item that we have carried for a number of years and which just keeps on selling. In many cases it is the item from which other projects evolve so is important to carry. It is disconcerting to be told that "we no longer carry this; it's not so hot, so it has been deleted."

Without the "not-so-hot-right-now" items which are old, trusty, boring, basic products, where will we all be in a few years time when the currently hot products start to fall away?

I would urge the manufacturers and wholesalers to keep stocking the basics to ensure there are crafters for the future. Apart from that, CHA was a great show – Peter Dyne, Golding Handcrafts, Wellington, New Zealand www.goldingcraft.com

I wanted to say "thank you" for addressing the growing trend that has designers working for free. I find this to be incredibly disturbing, as the fortunes of very large companies are built on the creative efforts of very talented women who give away their knowledge and talents. I don’t have an answer for this, other than no legitimate company should ever condone this practice, and it’s up to an individual’s conscience and scruples to enforce this. And the designers need to be educated about the value of their services. – Name Withheld

1. Dean Shalhoup, a columnist for the The Nashua (NH) Telegraph, wrote a recent piece that was another reminder of the good our industry can do. He told the story of a Dot Turner, an A.C. Moore clerk who has taken it upon herself to teach painting to the members of NETWorks, an agency for mentally disabled adults. A.C. Moore provided a classroom and the end result is an exhibition of the clients' work at a local college. "It’s not what they can’t do, it’s what they can do," Dot told Shalhoup.

Whether it's the Hancock program for St. Jude's, Warm Up America, or any one of a dozen other programs, our people and our products make the world a better place,

2. Our very best wishes to Bryan Bolin and his wife, Pat. Bryan is retiring from Plaid; Bryan and Pat are two of the industry's genuine good guys.

3. I dunno, call me crazy, but I think there's something goofy about how the world greeted Martha Stewart as a conquering hero, when in fact she is a convicted felon just released from prison. Recently Dr. Joyce Brothers wrote in Parade that too many Americans no longer have any sense of shame. I agree.

4. Recently, Gifts & Decorative Accessories reported that the winter gift trade shows went well, but there was concern by vendors "about fundamental changes that are affecting our industry, including lack of loyalty, knock-offs, and sourcing and pricing challenges. And the culprits are retailers and consumers." Boy, did that all sound familiar.

5. The National Retail Federation is celebrating because the U.S. Senate passed legislation making it more difficult to declare bankruptcy. NRF VP Katherine Lugar said, "This is a major victory for retailers and consumers who've gotten tired of picking up the tab for people who see bankruptcy as a first resort instead of the last resort it was intended to be." The House is expected to pass a similar law and President Bush is expected to sign it.

What nonsense. The majority of people who declare bankruptcy do so because of medical bills. Until this country does something about the high cost of medical treatment, millions of consumers are one illness away from bankruptcy, and no legislation will change that.

6. Recently a thread message board at Two Peas in a Bucket was of recent Tech Topics columns. The reputation of a well known scrapbook company was absolutely savaged. I have no idea what the entire story is because it was very one-sided until late in the discussion, and even then the company's response was, well, not helpful. Moral of the story: Vendors need to monitor appropriate message boards and respond quickly to negative comments.

MISCELLANEOUS NEWS 

TOYS. Two investment companies with ties to or history with the craft industry formed a consortium with a reality company to buy Toys R Us for about $5.7 billion, plus assumption of debt. Kohlberg Kravis Roberts is a major stockholder in Primedia, publisher of Creating Keepsakes, Craftrends, and other industry magazines. In the 1980s Bain Capital bought Tulip, the major fabric paint when fabric painting was the scrapbooking of its day, and later sold it to Duncan. Bain currently owns a Toys R Us competitor, KB Toys, which is in bankruptcy. The two companies were each bidding in the $3-3.5 billion range for the toy division, then joined forces when another company bid $5+ billion for the entire company, including the Babies R Us division. The media is now filled with guesses about what the new owners will do.

EASTER. The earliest Easter in more than a decade will hurt sales, says the latest survey sponsored by the National Retail Federation. The survey found that 75.9% of Americans plan to celebrate Easter but will be spending less, an average of $96.51, down sharply from $107.17 in 2004. That will reduce overall Easter spending to $9.6 billion from $10.5 billion a year ago.

TRADE. The U.S. trade deficit surged to $58.3 billion in January, the second biggest on record. Analysts polled by Reuters attributed the rise to higher oil prices and the elimination of textile quotas with China.

TV. Last Thursday NBC's Today Show had a segment on hosting sleepover parties for tween/teen girls, recommending knitting kits and jewelry/beading kits.

STORES. The Best of Times scrapbook store in Georgia is closing. It opened in 1996 and is reported to be the first scrapbook store to open on the entire east coast. The owners are concentrating instead on their impressive e-commerce site, www.scrapbooksuperstore.com.

MICHAELS. Lowered its fourth-quarter and fiscal-year results by $8 million to reflect the cumulative impact of a correction of its accounting practices related to leased properties. The adjustment reduces the fourth quarter diluted earnings/share from $0.80 to $0.75 and its fiscal year earnings by $0.06 from $1.51 to $1.45 ... The board of directors declared a quarterly cash dividend of $0.07/share, payable Apr. 29 to shareholders of record at the close of business on Apr. 15. The board also approved the repurchase of up to an additional 3 million shares of the company's stock.

LEGAL. Wal-Mart will escape criminal sanctions but pay $11 million to settle claims stemming from a federal investigation of illegal workers hired by the company's cleaning contractors, CNN reported. The investigation resulted in 245 arrests of undocumented workers in Pennsylvania in 2003. MarketWatch.com estimates $11 million comprises how much Wal-Mart sells in its store – in 11 minutes ... A bill (SB 582) introduced in the California senate would impose fines on retailers who do not tell vendors up front what they will be required to pay in slotting fees to first gain and then maintain space on store shelves.

PAPER. A consumer posted on an Internet message board that she found 300 12"x12" sheets of lignin-free, heavyweight card-stock paper for $12.99 – at Costco. The remainder of the thread was other consumers saying they were rushing out to Costco.

DIVIDENDS. Shares of Hancock dropped more than 16% after Hancock's board lowered its quarterly dividend by 50% to $0.06/share, payable Apr. 15 to shareholders of record Apr. 1. CEO Jane Aggers stated, "The Board's decision ... will allow us to maintain financial flexibility as we commit ourselves to improving operating performance in our existing stores in the near-term and implementing growth strategies in the future.... The past three years have seen an extraordinary level of capital expenditures for Hancock Fabrics in order to improve our distribution and technology infrastructure. However, the company's financial condition is sound. At our most recent year end, Jan. 30, 2005, outstanding debt was $31 million, or 19% of total capitalization."

SHOWS. Now there is another scrapbook/paper trade show, Scrapbook Productions – Dec. 1-3 in Salt Lake City. It's wholesale only, sponsored by "Scrapbook Productions Trade Show." Visit www.scrapbookproductionstradeshow.com/index.htm ... But the Scrapbook Biz show scheduled for April was postponed until April 11-13, 2006. The show will be in Columbus.

PEOPLE. Michaels named Susan Van Benten Odle as Merchandising VP for home dec categories such as frames, candles, storage, and art prints. She had been Division Merchandising Manager at Stein Mart. Michaels also promoted Walt Asbury to VP, Space Planning from Zone VP for the Mid-Atlantic zone ... Plaid promoted Bill Skinner to Sr. VP of Marketing, with responsibility for New Business and Product Development, Marketing Services, Media, and Network Marketing and Sourcing. Tracy Lanier was promoted to VP, Domestic Sales, plus special markets and OEM. Bill Kenna assumes the newly created role of VP/Sales Services. Julio Scull was hired as Dir. of International Sales, replacing Bryan Bolin who is retiring this month.

CROSS STITCH. Easy Street Crafts has a revamped website featuring its Square Hoop Frames, Sweet Suspensions, books, and more. Visit www.easystreetcrafts.com.

SHOWS. The Craft & Hobby Assn. completed an agreement with Offinger Management to assume management of the CHA Summer Show, formerly known as the ACCI Show. The agreement will be effective with the 2006 summer show. Terms were not released.

SHOWS. The Chicago-area Memories Expo is moving to the Pheasant Run Resort & Conference Center in St. Charles and the dates are May 20-21. Three design contests, 55 classes, and two evening crop parties are scheduled. Online registration is now available. Call 740-452-4541, email memories@offinger.com, or visit www.memoriescommunity.com.

AWARDS. The PBS series, Hands On Crafts for Kids and Scrapbook Memories, won Bronze Telly awards, the awards honoring local, regional, and cable TV programs. Both are produced by Kathy Stull and KS Productions ... Linda Wyszynski won Plaid's Horizon Award, given annually to a member of the Society of Creative Designers. The $3,000 grant is awarded to the member exhibiting the strongest combination of personal development goals and history of past achievements. Linda's work has been published in numerous magazines and newspapers and she has contributed to 16+ books including textbooks for the Embroiderers' Guild of America.

KIDS. Made By Hands has introduced interesting scrapbook-type kits for grade schoolers – Make It /Trade It Friendship Cards, Scrapbook Cards, and Make-Your-Own Scrapbooks. Visit www.made-by-hands.com.

PAINTING. The Ft. Worth Star Telegram published an article about the remarkable longevity of the Bob Ross Joy of Painting phenomenon. Consider: The Star Telegram says The Joy of Painting airs once every 30 minutes on a PBS station somewhere in the country; Ross products continue to sell well; there are 3,000 certified Bob Ross instructors around the world; "Vote Bob Ross For President" T-shirts are on sale at Target; Ross' popularity is worldwide – including Germany, Turkey – and Iran. And Mr. Ross has been dead for 10 years.

PAINTING. A highlight of the Society of Decorative Painters show (May 23-28, in Tampa) should be the Entrepreneurs Boot Camp on May 24. The all-day program is designed for teachers, designers, retailers, and vendors who want to expand or improve their business skills. Scheduled presenters include Shea Szachara, Donna Dewberry, Gretchen Cagle, Phillip Myer, and others. Visit www.decorativepainters.org for more info or to register.

PAPER. The Detroit News published another way to use paper: decorating Easter eggs by using Plaid's Mod Podge (one of our oldest brand names) to glue origami paper to wooden eggs, which, the News said, are available at Jo-Ann's. It's a Japanese technique called "Washi." For a photo/instructions, visit www.detnews.com/2005/homestyle/0503/12/E09-113689.htm.

REPS. Manufacturer/distributor of art/craft/memory products needs reps for the Atlanta, Los Angeles, and Washington (state) territories. Territories will generate $1-2 million dollars annually. Most accounts are existing accounts, thus there is very little cold-calling. Email resume to: Dionne Jordan-Heard at djheard@wetherbypartners.com.

DUCKWALL-ALCO. As part of its comprehensive review of individual store performance, the company will close 20 stores and may convert some others to its Market Place (more food oriented) concept.

AUSTRALIA. Lincraft, the Australian chain, has been sold to a syndicate of former shareholders and executives of the Victorian bargain retailer, Dimmeys. Lincraft had been in receivership, but the new owners are expected to expand and improve the chain.

NEW AGE, I. The most bizarre example of "new-age" crafts is the new tv series, Craft Corner Deathmatch, which premiered Mar. 9 and runs on Wednesdays on the Style Network. The show is described as "Martha Stewart Living meets Mad Max Beyond The Thunderdome." "It is totally edgy and definitely unique," writes Debba Haupert of BoBella and the Creative Spirit Café. "From the chain link fence surrounding the screaming audience and the vixen 'Craft Lady of Steel' to the graffiti walls and the dumpster-diving materials. Don’t know that the show will make it; I found it a bit too bizarre."

NEW AGE, II. Another example, which CLN described previously, is the Church of Craft. Visit www.churchofcraft.org.

A major European distributor is retiring and looking to sell the business. The shareholders have charged the owner to look for strategic investors willing and able to pursue the existing strategy and acquire the company.

The company is 25+ years old and carries a huge quantity of products in various arts-and-crafts categories. The founders developed a marketing formula that resulted in a strong market share in their home country, but strong growth and poor management qualities led to a management buyout in 1999. This buy-out team quickly restored the profitable home market and invested heavily in duplicating this successful marketing formula in surrounding European countries. These investments implied substantial initial losses needed to reach, one by one, the minimum break-even sales volume in each country.

Today every country is contributing positively to cash flow except one, which the company entered in 2002. These investments have created a platform able to multiply existing sales and profits by a factor equal to at least the number of surrounding countries.

The result has been more than a decade of double-digit growth in turnover and net profit after tax. Recent investments in new marketing outlets have resulted in increased profit margins and promise huge upward potential.

Gross income has grown from 4.2 million euros in 1999 to 9.7 million euros in 2004. After-tax profit has grown from 104,000 euros in 1999 to 1.5 million euros in 2004.

Interested parties should contact Mike Hartnett at 309-925-5593 or email mike@clnonline.com to sign a confidentiality statement.

Note: CLN will profile one company per issue, which will remain online for at least a year. A Profile is a perfect way for a new company to let itself be known to the industry, or for an established company to enhance its reputation by showing the industry its history, diversity of products, personnel, etc. For more information on how your company can be profiled, call Mike Hartnett at 309-925-5593 or email mike@clnonline.com.

To read the listings of the positions currently available, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 26.44 ... Change**: -2.08
Hancock Fabrics (HKF). Last*: 7.48 ... Change**: -0.50
Jo-Ann Stores (JAS). Last*: 28.80 ... Change**: -0.25
Michaels (MIK). Last*: 35.34 ... Change**: -3.74
Wal-Mart (WMT). Last*: 51.45 ... Change**: -3.14
CLN Retail Index. Last*: 149.51 ... Change**: -.2.6%
Dow Jones Index. Last*: 10,629.67 ... Change**: -2.8%

The poncho Martha Stewart wore when she left prison caused a firestorm among consumers – and the media. It was made for her by an inmate, Xiomaro Hernandez, who "crochets 12 hours a day," Stewart told the New York Daily News.

Stewart's website identified Lion Brand Yarn as the yarn used for the poncho, and Lion personnel quickly put a crochet poncho pattern online at www.lionbrand.com.

As of Friday, the pattern had been downloaded more than 250,000 times – and the media noticed. The Wall Street Journal reported the news on Friday, Good Morning America filmed a piece, and the current issue of People reportedly has an article.

There's still a question as to which company's yarn was used by Hernandez, the Journal reported, but that's irrelevant, Lion officials believe. The key is to satisfy the need for the pattern.

Other companies have added a poncho pattern to their sites. Traffic at Bernat's (www.bernat.com) site has tripled since it added knit and crochet patterns for the poncho, the Journal reported. Michaels' site has a link to the Lion pattern, and Caron has a crochet poncho kit on sale at www.caron.com.

A spokeswoman for Martha's company told the Journal, "We are pleased to see America has so much interest in crocheting."

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