Date: June 6, 2005
Vol. IX, No. 11

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TABLE OF CONTENTS

COMMENTARY: HEALTH CARE AND YOUR BUSINESS 

There are now at least eight states considering legislation that would require retailers to pay more of the cost of their employees' health insurance; that way, the workers won't have to rely on tax-supported state/federal Medicaid programs. The logic is simple: taxpayers are, in effect, subsidizing retailers. However, wouldn't retailers simply raise their prices and taxpayers would pay that way? I think as consumers/taxpayers, we're going to pay either way.

The legislation is similar to the recently passed bankruptcy bill: it sidesteps the problem of high medical costs. "Our nation – including large and small employers – faces a health care crisis," said Susan Chambers, Wal-Mart's Exec VP of Benefits Administration.

Meanwhile, this issue of CLN includes a report on legislation in Congress that would allow members of trade associations to pool together to buy insurance. That could be a tremendous benefit and is well worth your consideration.

How big an issue is this? Vote in this issue's Industry Poll.

Designing Perspectives. A TV producer issues a call for designers and projects for new, crafty television series.

Scene & Heard. The latest news from the New York Stationery Show, the Japan Hobby Show, and the Society of Decorative Painters convention.

Category Reports. It seems everyone is screaming at – or for – Wal-Mart.

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

Is the cost of medical insurance affecting your business? Has the cost of medical care reached a crisis level? To vote, click on Industry Polls in the right-hand column or click HERE.

Vendors and retailers seem to be employing different marketing strategies this year. Retail respondents to the CLN poll are planning a modest increase in their ad/marketing dollars while vendors are planning to cut their expenses.

Almost one fifth (18.2%) of retail respondents will substantially increase their ad/marketing dollars and 27.3% will boost those expenditures slightly. More than a third (36.4%) will maintain the same budget while only 9.1% will slightly decrease their 2004 expenses and 9% will decrease them substantially.

Vendors are another story: 29.4% are planning substantial cuts and another 17.7% will make modest cuts. Maintaining the 2004 budget is the plan for 11.8%, while 29.4% plan a modest increase and 11.8% will make a substantial increase compared to 2004.

The Home Sewing Assn. and the International Textiles Expo have agreed that there will be one trade show this fall – Sept. 27-29 at Caesar's Palace in Las Vegas, originally scheduled as the ITE show. There will also be one only spring, 2006 show – at The Rio, March 28-30 in Las Vegas, originally scheduled by HSA. There will also be only one show in the fall of 2006, but details have not yet been completed. Websites have not been updated as of Friday, but should be soon. Visit www.sewing.org and www.textileshows.com.

Luxury retailers such as Neiman Marcus and Nordstrom did well, as did various chains catering to teenagers, but it was a lackluster month for most others. The coldest May in 22 years didn't help matters, the Associated Press reported.

Jo-Ann's same-store sales were flat and Hancock's same-store sales fell 8.4%. (Michaels and A.C. Moore report their sales by quarter rather than by month.) Wal-Mart (same store sales up 2.5%) was outpaced again by Target (+5.1%)

Others. Walgreen, +8.8% ... CVS, +5.8% ... Target, +5.1% ... Costco, +5.0% ... Dollar General, +4.3% ... J.C. Penney, +3.5% ... Wal-Mart (U.S.), +2.7% ... Duckwall-ALCO, +2.2% ... Sam's Club, +1.6% ... Family Dollar, +0.2% ... Big Lots, -0.2% ... Factory Card & Party Outlet, -0.2% ... Pamida Division (ShopKo), -5.0%.

Manhattan District Attorney Robert Morgenthau, the IRS, and the SEC continue to investigate Charles and Sam Wyly's use of offshore family trusts as a way to evade taxes on stock options, reported the Wall Street Journal in Friday's edition. Charles is the Chair and Sam the Vice Chair of Michaels. The Wylys have denied any intentional wrongdoing.

According to the WSJ, the government is investigating whether the Bank of America may have involved numerous wealthy clients in this scheme, which was outlawed by the SEC in 2003. The IRS concluded the operation was widely used as a tax shelter, and promises to track down the taxpayers who used it. The Wylys may simply be the tip of the iceberg.

The Wylys' lawyer is confident the brothers will not be charged. "It's very difficult for anybody to make a case against anybody who had high-priced, sophisticated advice."

A key legal question, however, is whether the Wylys truly surrendered control of the trusts and therefore the Michaels shares/options the Wylys contributed to them. "That may be difficult to establish," the WSJ wrote, "because many of the trusts were overseen by a Canadian accountant, Michelle Boucher, who works at a Cayman Islands fund-management firm that is listed in securities filings as the contact for Maverick Fund Ltd., an offshore hedge fund founded by the Wyly brothers in 1997."

The WSJ also cited 20+ "Wyly-linked" companies such as Devotion Ltd, which the WSJ described as a holding company with two directors and no employees run by a farmer on the Isle of Man. Another example was a resident of the Isle of Man who "lived in a row house who signed the paperwork for a $25 million loan from Bank of America in 2002."

Hancock entered into an agreement with Wachovia Bank, National Association, and Wachovia Capital Markets, LLC whereby Wachovia has committed to use its best efforts to arrange for and syndicate a secured revolving loan and letter of credit facility for Hancock of up to $110 million. The facility, which would replace Hancock's existing unsecured $50 million credit agreement, is expected to be completed in four to six weeks.

CEO Jane Aggers stated, "The new credit arrangement, once completed, will provide us with a significant amount of financial flexibility as we move forward over the next few months to implement our merchandising and marketing plans. By moving to a secured credit facility that utilizes the strength of our balance sheet, we will have the necessary capital available to focus on improving our operating performance."

An ongoing problem in the U.S. is the cost of health insurance. It is particularly true for small businesses and individuals who, until now, could not join an insurance "pool" to obtain lower rates. Now Congress is considering the Small Business Health Fairness Act of 2005 (H.R. 525 in the House of Representatives) which would allow businesses and individuals who are members of a trade association to buy insurance through their association. If CLN reads the legislation correctly, groups such as the Craft & Hobby Assn., the Home Sewing Assn., and The National NeedleArt Assn. could offer their members access to insurance that should cost less than if members bought it on their own.

To read the legislation, visit http://thomas.loc.gov, then type Small Business Health Fairness Act of 2005 in the search engine. It is filled with legalese, and the devil may be in the details, but the bill could at least allow association members a choice they don't have now. If you would like to write to your Congressman, visit http://www.house.gov/writerep.

Provo Craft announced it has taken on an investment partner, Sorenson Capital, a private equity fund based in Salt Lake City. Provo's management has retained a significant equity stake in the business and will continue in their current roles. The new resources will be used to fund Provo's growth strategy and new-product development.

Founded in 1964 with one retail store, Provo has grown to include Robert's Crafts, a 10-store chain in Utah and Idaho, and 800 employees who distribute 6,000+ proprietary and 20,000+ non-proprietary paper-craft, home dec, and craft products. Revenue is more than $100 million/year, according to the Salt Lake Tribune. It has a 200,000 sq.-ft. distribution facility in Spanish Fork, UT and plans to open an 11th Robert's store in Clinton, UT.

Fraser Bullock, managing director of Sorenson Capital and former COO of the 2002 Winter Olympics, told the Desert Morning News, "[Provo management has] a tremendously successful track record of very robust growth. We will take no management role because we have full confidence in them. We want to support them and provide resources to continue strong growth in the business."

Provo President/CEO Eric Larsen told the News the equity will be used to add liquidity to existing investors and pay off debt. CEO Robert Workman told the Salt Lake Tribune the capital will enable Provo to proceed with several planned strategic mergers and acquisitions. "There are some companies we have our eye on," Workman said.

SoHo Publishing is re-launching Yarn Market News as a five-times-a-year trade magazine for retailers, vendors, publishers, and others in the yarn business. The first issue was mailed May 25 and will be distributed at the TNNA/INRG show in Columbus, OH June 11-13. Regular features include columns dealing with marketing, retailing, money, management, the Internet and communications. The premier issue will include a fall fashion and color forecast.

Karin Strom, former editor of Woman's Day Specials knitting and needlework publications, is the editor. She's also a former employee of Tahki Yarns and JCA. SoHo publishes Vogue Knitting, knit.1, Family Circle Easy Knitting, and Family Circle Easy Crochet. Its book division produces about 30 craft titles a year, including the Vogue Knitting "On the Go!" series. The website, not yet operational, is www.yarnmarketnews.com.

YMN is free to industry professionals. For info, call 908-496-9792 or email ymninfo@yarnmarketnews.com.

The official fastest-crocheter in the world has teamed with Canadian manufacturer CNS to produce the Lily Chin Signature Collection of six yarns. The Collection will premiere at the TNNA show in Columbus later this month and be available in stores by August. Retail prices range from $5.99 to $7.99 for a 50-gram ball.

Lily won the title, World's Fastest Crocheter and recently appeared on the David Letterman Show and other tv series. She is the author of several knitting books and has worked with designers Ralph Lauren, Vera Wang, Diane von Furstenberg, and Isaac Mizrahi.

The Collection includes Tribeca (mohair) ... Chelsea (merino wool, cotton, and acrylic) ... Nolita (light chunky weight) ... Central Park (wool blend boucle with Lycra) ... Gramercy (merino wool) ... Greenwich Village (mohair with rayon).

U.S. retailers interested in carrying the line should call A2Z Fibers at 267-523-1100; Canadians, call CNS Yarns at 877-244-1204. Or visit www.lilychinsignaturecollection.com for an invitation to the breakfast launch event at TNNA.

Net income for the quarter ended Apr. 30 jumped 58.6% to $46.5 million ($0.33/diluted share). The 13 analysts surveyed by Thomson First Call expected, on average, the company to earn 29 cents a share in the first quarter, Dow Jones News reported.

Sales increased 13.1% to $821.0 million and same-store sales rose 7.8%, thanks to a 2.2% increase in average ticket, a 4.9% increase in transactions, and a 0.7% increase in custom frame deliveries. The stronger Canadian dollar contributed approximately 0.4% to the average ticket increase.

The top regions were the Pacific, Southeast, and Northern zones, and the best departments were Paper Crafting, General Crafts, Wedding & Ribbon, and Kids Crafts "with strong Yarn department sales contributing solidly to overall same-store sales for the quarter."

Other numbers: Operating income jumped 48.9% to $77.5 million ... Gross margin improved from 35.8% of sales to 37.1% ... Selling, general, and administrative expenses as a percent of sales declined to 27.4% from 28.3% ... Cash balance was up $177.1 million to $558.5 million compared to a year ago ... Average inventory/Michaels store increased 0.9% to $1.035 million ... Incremental inventory investments, primarily in yarn, were largely offset by inventory reductions in other categories.

CEO Michael Rouleau attributed the strong results to the Perpetual Inventory and Automated Replenishment merchandising systems. "These systems ... enable us to redeploy our investment in inventory to categories with the strongest growth potential and reduce our investment in slow moving products, thereby improving the overall quality of our inventory and enhancing our gross margin performance over the long term," Rouleau said.

During the quarter, the company opened 14, relocated eight, and closed one Michaels store; opened one Aaron Bros. store; opened one Star Wholesale store; and opened one Recollections store. The current store count is 860 Michaels, 165 Aaron Brothers, nine Recollections, and four Star Wholesale operations.

Michaels forecasts same-store sales for the second quarter to rise 5%-7% and operating margins to increase 100 basis points; that would result in an increase in operating income of 25%-30%. Gross margin as a percent of sales, however, will contract approximately 40 basis points due to the timing of merchandise plan-o-gram resets and the related markdowns. Diluted earnings/share are currently expected to be $0.20-$0.22, including the $12.1 million in costs for redemption of $200 million of 9 1/4% Senior Notes in July.

For the second half of the fiscal year, the company expects same-store sales to increase 3%-5% and operating income to rise 20%-25% with net income and diluted earnings/share increasing 30%-35% in the third quarter and 20%-25% in the fourth quarter.

If those expectations come to pass, for the year same-store sales will have risen 4%-6% and total sales 9%-11%. That would result in diluted earning/share increasing 25-30%.

Every one likes a happy ending and I have a good one for you. My sales rep contract with Martin/F. Weber and Martin Universal Design was over at the end of 2004. I left after over 20 years with the companies owing me a very substantial amount of back commissions. The happy ending is that I received my last check from them paying me in full for ALL the back commissions owed to me. This act of corporate fiscal responsibility, especially in this day and age of corporate ethical decay, meant more to me than the money. It meant that I could retain the respect I have always held for owner Dennis Kapp as both a business man of great acumen and my good friend. – Gerry Gerri

(Comment: CLN published this because we have heard so many cases of reps not being paid their commissions – we thought this was a nice change of pace.)

1. Lately, the web stock sites such as Motley Fool have written about the viability of Michaels, A.C. Moore, etc. The writers have been generally positive, but just once, I wish these experts would actually go into one of the stores, rather than simply scan the balance sheets.

Business Week scans the balance sheets, too; the 5/23 edition lists 15 companies "ripe for a takeover" because they are "Cash-Rich, Good Assets – And Cheap." One of the 15 is Jo-Ann's. There is absolutely no evidence of any sign that Jo-Ann's will change hands, but that didn't matter to the number-crunching journalist.

2. A recent thread on Two Peas asked members where/how they made their first scrapbook purchase. The answers fell into two groups: they bought a kit on QVC or they bought supplies at a Creative Memories home party. Perhaps this is a sign that home parties and beginner kits, no matter where they're purchased, are not really competition, but helpful tools for attracting new customers.

3. A veteran of the apparel industry called to comment on CLN's piece about "markdown money" and "chargebacks." He said the practices are rampant in that industry and he's delighted to be in our industry now – although he sees these practices getting worse as time goes by. Maybe so, but if the Attorney General is investigating the possibility of fraud and criminal charges for apparel retailers, maybe that will discourage our retailers from such shenanigans.

JOYS OF RETAILING, I. As a retailer, you can do everything right but still.... The Gaithersberg, MD Business Journal recently reported on a murder trial in which the victim was shot while in his car and drove it into the wall of the local A.C. Moore ... WFMZ-TV in Allentown, PA reported a bank was robbed in nearby Wymissing and when witnesses said the robber appeared to run into the A.C. Moore store, police evacuated the store; the robber was never caught. One crafter told the reporter, "At first nobody knew what it was, but when you walked out and saw the police with the rifles, that was like, OK, something is really going on and they were in the store and that's pretty scary."

JOYS OF RETAILING, II. A.C. Moore CEO Jack Parker sold a total of 111,365 shares of ACMR stock for $2.8 million and Patricia Parker sold 177,270 shares for $4.6 million. President Larry Fine exercised options for 10,000 shares for a $215,600 profit, and exec Leslie Gordon exercised options for 40,000 shares for a profit of $970,400. All these transactions occurred between Apr. 26 and May 19, according to Vickers Stock Research.

CHANGES. A.C. Moore and Hancock Fabrics are opening stores in Myrtle Beach in space vacated by Ben Franklin Arts, Crafts & Framing, which will close in July, reported the Myrtle Beach Sun News. BF owner Steve Babinchak told the paper he was closing because of competition from a nearby Michaels and he will be liquidating $1 million worth of inventory. These changes are occurring at the Northgate Shopping Center which had been an Air Force base that was closed 10 years ago. (Comment: With another rash of recently announced base closings, we'll probably see more bases developed into shopping centers.)

RETAIL NEEDS. Stephanie Salter, a columnist for the Terre Haute (IN) Tribune Star, asked readers what kind of stores they would like to see open in the north side of Terre Haute, which is apparently under-retailed. According to Salter, requests for Target far outnumbered requests for any other big-box retailer, and "as for specialty shops, 'a fabric store like the one we had before we lost Jo-Ann's' was the clear leader."

KIDS. Michaels will offer a Free Family Event at each store on June 25, 10 am - 3 pm. The sponsoring vendor, Klutz, has created an exclusive Hatching Party activity kit which marks the introduction of Chicken Socks, a new activity line from Klutz.

STOCK. Prudential lowered his fiscal second-quarter earnings and 2006 estimate for Wal-Mart a penny to 64 cents and $2.63 because of concerns over profit margins.

SHOWS. Advance registration for the CHA Summer Show July 15-17 ends June 22. CHA members can register online. (Not a member? Visit www.craftandhobby.org to join.) The education programs begin Thurs., July 14 with six Retail Summit seminars and 14 Mega Workshops. A wide variety of technique classes will be also be offered July 14-16. For a complete schedule or to obtain a buyer registration kit, email chasummershow@offinger.com, call 740-452-4541, or visit www.chasummershow.com. The show will also include a Designer Forum, an opportunity to discuss design needs with 50+ professional designers.

TOYS. The Board of Directors of the Toy Industry Assn. voted to keep Toy Fair in New York City at the Jacob K. Javits Convention Center at least through 2007.

IMPORTS. The International Trade Commission agreed to proceed with an investigation into Tara Material’s claims that China has been dumping artist canvas into the USA. The results should be announced by year's end. (Note: This is a very complex issue; to read two sides of the controversy, click on Business-Wise in the left-hand column – and then "The Canvas Dumping Issue" in the right-hand column. And read the report in the 5/2/05 edition of CLN in CLN Archives.)

NEEDLEWORK. The Needle Arts Studio with Shay Pendray keeping rolling along. The 12th series uplinks to PBS stations July 24. Sponsors include Coats & Clark, DMC, TNNA, Lion Brand Yarn, and the National Academy of Needlearts. Projects will be available at www.shaypendray.com, and a kit and a DVD are also available – call 800-813-3103.

SEWING. The media is paying more attention these days. Coca-Cola has an ad in the current Teen Vogue encouraging teens to sew and "The View" section shows readers how to make a personalized tank top. Meanwhile, the Pottery Barn teen catalog and Gap for Kids are promoting personalizing clothing via sewing. And the tv series Gilmore Girls has the mother sewing periodically, including altering a wedding dress.

PAINT. Liquitex has reformulated its professional color ranges. The names are changed, too. Liquitex High Viscosity Acrylics is now Heavy Body, and Medium Viscosity is Soft Body. New colors have been added, and others have been reformulated and renamed. Shipments of the new products began last week. For more, visit www.liquitex.com.

CLAY. Sino Harvest Ltd. of Hong Kong acquired the assets, trademarks, and patents of the Makin's Clay line from Greensward Co. Sino Harvest is a new company owned by industry pioneer Bill Mangelsen, who has resigned from Greensward to concentrate on the Makin's Clay line. The line is distributed in North America by Walnut Hollow (www.walnuthollow.com) for the craft market and by Chenille Kraft (www.chenillekraft.com) for the education market. Kars (www.kars.nl) of the Netherlands handles most of the European distribution. Walnut Hollow will be displaying the Makin's Clay line in its booth at the CHA Summer Show. For more info, email bill_mangelsen@makinsclay.com or visit www.makinsclay.com.

MEDIA. Marian McEvoy launched her book tour promoting Glue Gun Decor with an appearance on Oprah. McEvoy raved to Oprah about the quality of the Aleene’s brand and glue gun and how Aleene’s products (now produced by Duncan) make creativity easy and affordable. During the tour, she is giving away Aleene’s Ultimate Glue Guns and bottles of Aleene’s Tacky Glue to fans. The gun is featured on the book cover. The book includes 96 pages of embellished walls, ceilings, furniture, frames, lampshades, pillows, upholstery, flowerpots, etc., with materials ranging from fabric and appliques to shells and leaves.

MAGAZINES. Primedia's licensing/merchandising division announced an agreement with Sun-K, a Japanese manufacturer and retailer, to publish a local version of Creating Keepsakes magazine. A Japanese version of Primedia's Simple Scrapbooks will follow, as will a version of the Creating Keepsakes University program. Sun-K is the company that introduced the traditional Western version of decorative painting to Japan.

MAGAZINES. G+J USA Publishing, publisher of Family Circle, Fitness, and Parents, has been sold to Meredith Corp., publisher of Ladies' Home Journal, Better Homes and Gardens, and various industry magazines, for $350 million. The sale makes Meredith the country's second-largest publisher, in terms of circulation, behind Time Inc., reports Media Week.

ROLODEX. DAB Design moved to 157 Broad St., Ste. 308, Red Bank, NJ 07701. The phone (732-224-8686), fax (732-224-1191), and email (dab@monmouth.com) remain the same ... The WALLIES Vermont office moved to 122 Merchants Row, Rutland, VT 05701-5911. Call 802-747-4090, fax 802-747-4060, and email nancy@wallies.com.

PEOPLE. AccuCut Systems named Greg Gaggini, former GM of a subsidiary of Oriental Trading Co., as the company’s new president. Gaggini said, "... you’ll see changes in merchandising, service, corporate image and more. We’re even investigating new markets for AccuCut’s quality die cutting systems." Steve Nabity remains CEO.

PEOPLE. Judy Lombardo, long time VP of Merchandise for Rag Shops, announced her retirement ...... CLN has learned that Kathryn Henkens, Aaron Bros. Merchandising VP, will leaving in late summer to pursue other opportunities ... Richard Snowden, formerly of Legion Paper, is the new West Coast Sales Manager for MacPhearson's ... Mike Saubert is no longer Exec. Dir. of the Society of Decorative Painters. To learn more about the SDP convention and management changes, visit Scene & Heard or click HERE.

LOOKING TO HIRE. Daylight Co. needs a VP of Sales & Marketing to lead the hobby/craft sales team. Expectation is to double sales within two years. Previous craft/hobby experience desirable but not essential. U.S. based with some international travel. Attractive salary + bonus. Apply with resume to HR Dept., Daylight Company LLC, 3090 South Jamaica Ct., Ste. 112, Aurora CO 80014. Fax 303-750-9895; email info@daylightcompany.com.

DELTA. Popular industry veteran Nina Rancourt assumed the role of Dir. of Sales and Olive Choa the role of Dir. of Marketing. Both will be adding new members to their management teams. For career opportunities at Delta, visit www.deltacrafts.com or call 800-423-4135.

To see the latest job openings, click on Jobs in the left-hand column, or click HERE.

A. C. Moore (ACMR). Last*: 29.31 ... Change**: -2.08
Hancock Fabrics (HKF). Last*: 5.36 ... Change**: -0.50
Jo-Ann Stores (JAS). Last*: 25.75 ... Change**: -0.25
Michaels (MIK). Last*: 42.66 ... Change**: -3.74
Wal-Mart (WMT). Last*: 47.35 ... Change**: -3.14
CLN Retail Index. Last*: 150.43 ... Change**: +4.5%
Dow Jones Index. Last*: 10,460.97 ... Change**: -0.1%

1. "The simple principle in life is to find out what she (the female consumer) wants and give it to her. It's worked in my marriage for 35 years and it works in laundry." – Proctor & Gamble CEO A.F. Lafley (Wall Street Journal)

2. "Should any political party attempt to abolish Social Security, unemployment insurance, and eliminate labor laws and farm programs, you would not hear of that party again in our political history. There is a tiny splinter group, of course, that believes you can do these things. Among them are...a few other Texas oil millionaires, and an occasional politician or business man from other areas. Their number is negligible and they are stupid." – President Dwight D. Eisenhower, 11/8/54

3. "The restrictions implemented by the U.S. have severely impacted China's textile production. If this cannot be handled well it will severely affect the course of bilateral economic relations and trade." – Vice Premier Wu Yi, to Xinhua, the official Chinese news agency

4. "You want yarn, you go [to Michaels]. You want stuff to paint, you go there. You want anything you need to make something else, Michaels has it. Wal-Mart doesn't; it just doesn't have the selection .... Michaels is one of those places that recognizes that people don't want three aisles of low-priced goods; they want 20 aisles to choose from." – RealMoney columnist James Cramer, published in TheStreet.com

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