Date: March 20, 2006
Vol. X, No. 6

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TABLE OF CONTENTS

COMMENTARY: The Future of Hot Trends  

The March 6 edition of CLN included a three-part series comparing scrapbooking to previous hot trends in the industry. The purpose was not to say scrapbooking is doomed or impervious to market forces, but to point out mistakes made by cross stitch retailers and vendors that sowed the seeds for eventual decline. Let's not repeat the same mistakes.

Regardless of the eventual future of scrapbooking, I hope readers do not infer from the reactions to those articles (published in Memory, Paper & Stamps) and previous comments published in CLN that cross stitch, wearable art, macrame, decoupage, etc., are doomed because they once were industry leaders.

The yarn sales the past few years demonstrates that a once-hot, now-quiet category doesn't necessarily stay quiet. Much of today's card-making trend includes decoupage, and we're already seeing the beginning of the resurgence of wearable art. I'm getting the same feeling about cross stitch, too, and I saw some beautiful macrame purses at the recent CHA show.

NEW COLUMN! Industry Research. Below is a summary of various market research efforts. That material will also have a permanent place on the CLN website and will be updated as new studies are published.

NEW COLUMN! Store Design Tips. A retail design pro offers simple, basic suggestions for retailers to enhance their stores' selling environment.

Kate's Collage. Learn more about the Decorative Arts Collection – hundreds of incredible paintings from the 1700's to the present – and all part of our industry's proud history.

Memory, Paper & Stamps. Is scrapbooking doomed to decline? Or is it different enough from previous trends that it will to grow and prosper. CLN readers are divided on the subject, but each has thought-provoking ideas. Read their thoughts, then vote in the CLN poll.

The debate continues: Will scrapbooking eventually decline, as other previously hot trends have done? Or is it unique enough to avoid that fate and continue to grow? To vote, click on Industry Polls in the right-hand column or click HERE.

Apparently we asked a really obvious question when we asked CLN readers if they thought bankruptcy laws were fair. Nobody said the laws were fair. The only disagreement among voters was the extent of their dislike for the issue. A whopping 61.5% thought the laws were unfair and 38.5% thought the laws were very unfair.

The creditors voted "overwhelmingly" to accept the company's offer of payment of 25 cents on the dollar, owner Sun Capital kicked in $5 million, and so the company has avoided bankruptcy for now. According to a letter dated Mar. 6 from President/CEO Ron Staffieri, the payments have already been made to enable the restructuring plan to go forward..

"The restructuring plan, when completed, is expected to create more stability and continuity and allow Rag Shops to better serve its customers," Staffieri said. "We anticipate that you will continue to support the efforts of Rag Shops with appropriate trading terms and credit limits. We look forward to discussing this critical step with you over the next several weeks."

China remains the dominant force in imports, job outsourcing, the U.S. trade deficit, and the rising demand for oil. but the situation appears to be more volatile than first thought.

1. Employee Shortage. Prices for Chinese goods maybe be rising as Chinese factories are forced to increase wages to attract workers, Forbes reported. "From the textile and toy factories of the south to the corporate headquarters and research labs in Beijing and Shanghai, the No. 1 challenge today is finding and keeping good workers. Turnover in some low-tech industries approaches 50%, according to the Institute of Contemporary Observation, a Shenzhen labor research group. Guangdong Province says it has 2.5 million jobs that remain unfilled, while Jiangsu, Zhejiang, and Shandong provinces say they, too, face shortages of qualified workers."

2. India. Wal-Mart knows more about importing from China than anyone, and the company may be hedging its bets, Reuters reported. The company plans to buy $630 million worth of apparel, home furnishings, textiles, shoes, and jewelry directly from Indian factories in 2006, up 40% from last year, Reuters said.

3. Congress. There appears to be a rising chorus of complaints that China refuses to allow its currency to float freely vis a vis other world currencies, which critics claim keeps Chinese goods at artificially low prices. Some in Congress have threatened legislation to slap tariffs on Chinese imports unless the currency policy is changed.

Michaels made various accounting changes regarding inventory, share-based compensation, leases, and vendor allowance recognition. Before their cumulative effect, net income for the fiscal year rose 8.8% to $219.5 million ($1.59/diluted share). Sales rose 8.3% to $3.676 billion and same-store sales rose 3.6%, due to a 0.5% increase in transactions, a 2.7% increase in average ticket, and a 0.4% increase in custom frame deliveries. A favorable Canadian currency translation added approximately 0.4% to the average ticket. The top categories were General Crafts, Needlework/Yarn, Kids Crafts, Scrapbooking, and Candles/Bakeware, and the top regions were the Pacific, Southeast, and Southwest.

For the year, margins increased approximately 45 basis points due to "stronger sales of merchandise at regular price, improved domestic sourcing, and additional efficiencies in our supply chain and vertical manufacturing operations."

Before the accounting changes, fourth-quarter net income rose 13.6% to $117.2 million ($0.86). Sales rose 7.2% to $1.270 billion and same-store sales increased 2.4%, thanks to a 2.2% increase in average ticket and a 0.2% increase in transactions. A favorable Canadian currency translation added approximately 0.2% to the average ticket increase. The top regions were the Southeast, Southwest, and Pacific and the top categories were Jewelry & Beads, Candles & Bakeware, Kids Crafts, Art, and Frames.

However, margins declined due to later sell-through of holiday seasonal merchandise, additional markdowns on slow-selling fashion yarn, a more promotional holiday environment, and the acceleration of 2006 merchandise reset markdowns into fiscal 2005.

To read the complete report, visit www.prnewswire.com/micro/MIK. (Warning: you may need to be a CPA to understand all of the accounting changes – all of which are reported under Generally Accepted Accounting Principles [GAAP].)

For this year, Michaels expects sales to increase approximately 8.5%, driven by a forecasted same-store sales increase of approximately 2% to 3%, new store sales growth of 4%, and an estimated 1.5% increase for the additional calendar week of business in the year. The company predicts same-store sales will decline 1%-2% in the first quarter "primarily due to continued softness in the Yarn category."

Net income for this fiscal year is estimated to increase 25%-27% to $275-$280 million before cumulative effect of an accounting change of $220 million. That translates to diluted earnings/share of $2.00-$2.05.

During the year, the company expects to open 40-45 new stores, relocate and/or expand 14 stores, remodel 67 stores, and continue construction of the Centralia, WA distribution center.

Net loss for the year was $23.0 million ($1.01 loss/diluted share), compared with net income of $46.2 million ($2.02) the previous year. The results include a $27.1 million goodwill impairment charge (see below). Results for the previous year include debt repurchase costs which reduced pre-tax income by $4.2 million. Excluding these items, pro forma net earnings were $4.1 million ($0.18) versus $48.8 million ($2.13) the previous year. Net sales for the year increased 3.9% to $1.883 billion, but same-store net sales decreased 0.8%.

Net loss for the fourth quarter was $18.0 million ($0.78), compared with net income of $32.3 million ($1.40) in the prior year. These results include the $27.1 million goodwill impairment charge. Excluding that charge, net earnings were $9.1 million ($0.39). During the quarter the company recognized $3.2 million of pre-tax income ($0.08), related to gift card breakage – purchased but underused gift cards.

Net sales for quarter rose 2.7% to $604.1 million, but same-store net sales decreased 3.0%. Gross margins for the quarter fell to 41.9% of net sales from 45.4% due to higher promotional activity and markdowns. Selling, general, and administrative expenses increased to 35.8% of sales from 33.3%.

Chair/CEO Alan Rosskamm said, "This year clearly has been a challenging and disappointing time for Jo-Ann Stores. We entered the year with high expectations and, in hindsight, with overly optimistic merchandising plans. The challenges of a slowing market and declining traffic were exacerbated by merchandising and marketing decisions that proved to be ineffective as we tried to counter negative industry trends during the year.

"Fiscal 2007 will be a year of transition as we implement our previously communicated repair plan," Rosskamm added. "We expect the first half of the year to be difficult, due to ongoing industry softness, the costs associated with the execution of repair plan initiatives, and a merchandise assortment project designed to reduce space designated for finished products and expand space allocated to craft components.

"However," Rosskamm added, "in the second half of the year we expect to be positioned for substantial improvement in our operational and financial performance. We believe this strategy will enable us to end the year with lower debt balances and result in a stronger, more disciplined organization."

This past year, Jo-Ann's opened 40 superstores and four traditional stores, and closed 57 traditional stores. Total store square footage increased 4.8% to 16.198 million sq. ft. The year-end store count: 684 traditional stores and 154 superstores. This year the company anticipates opening 26 new stores and closing 55-60 existing stores.

As previously reported, last month Jo-Ann's increased the size of its senior bank credit facility from $350 million to $425 million.

Regarding the "Goodwill Impairment": An annual review is required of all public companies by the SEC. The press release stated: "As a result of the evaluation, the Company determined that the carrying amount of the goodwill exceeded its implied fair value, and that a total impairment of goodwill existed. This impairment conclusion considered the market capitalization of the Company, declining business trends, softness in our industry, deteriorating Company performance, and the Company's assessment of its anticipated near-term future performance. During the fourth quarter, the Company recorded a non-cash charge of $27.1 million to recognize the goodwill impairment. No tax benefit is recognized as a result of the impairment charge."

Regarding this year, the company expects same-store sales to drop 4%-5% in the first half of the year, and improve slightly in the second half ... Gross margins to improve 75-125 basis points, including gross margin rate deterioration of 150-200 basis points in the first half of the year ... Selling, general, and administrative expenses as a percentage of net sales to increase 95-125 basis points ... Capital spending of $50-$55 million for new store openings ... Strengthening the balance sheet through inventory reduction of $45-$50 million, and a resulting debt reduction by the end of the year of $40-$50 million.

Before the earnings release, Jo-Ann's stock closed today at $12.18. To read the entire earnings statement, visit http://phx.corporate-ir.net/phoenix.zhtml?c=74290&p=irol-IRHome.

In a conference call with analysts, Rosskamm cited the worst slowdown in sewing since the 90's as a problem. There was a slowdown the past year in home dec textiles, but also a recent slowdown in quilting and apparel fabrics.

The basic strategy for the year is a) reduce inventory; b) restore gross margin through tighter buying discipline on seasonal and fashion items; c) reduce cost, such as lowering the number of store openings this year to 26, lowering ad spending by curtailing ad inserts, and more disciplined use of coupons; d) increase sales. The top priority remains hiring a new Chair/CEO.

Increased sales should come from adjusting inventory to increase craft components and decrease finished, seasonal, and home dec items. All departments will be reset, a process that should be concluded by the end of June. At the moment the categories trending best are jewelry and kids crafts; look for those categories to be expanded.

Other news: the new distribution center in Alabama should be fully operational by May. The center will add expense in first quarter, but should lower costs throughout the year.

Rosskamm expressed his continued faith in the concept of the craft/fabric superstores and said, "I believe in this company and this industry. We've always come through hard times stronger than ever before."

"Jo-Ann is struggling through a business model transition that could take two to three years to complete, which is exacerbated by deteriorating fundamentals, especially in its sewing-related business," Wachovia analyst Ralph Jean told MarketWatch after the conference call.

"I just returned from Orlando, where I visited several local scrapbooking stores. To my disappointment, one recommended store was in the middle of closing; and the Memories store had recently shut down. The third, a wonderful store, was battling legal problems and the owner then emailed me over the weekend to tell me she, too, is closing.

"All three closed their doors due to issues with their landlord.

"One store's existing lease agreements were affected when PaperZone bought out the Memories stores, and the Memories store in Orlando lost its lease. Another store – my source says that mall management wanted to move the store, give them less space, and charge them more rent. The owner took this as the sign it was time to close.

"The third store and its owner are wonderfully friendly. Patti kept her lights on and chatted with us past midnight, despite a court date in two days. I don’t know the details, but she wrote me later saying, "I'm having to walk away from it all. Tomorrow will be my last official day…. Unfortunately people much bigger and badder than I am don't believe in my dream and further more, don't care. They want me gone and went to huge lengths to see that no matter what direction I take, I'm the loser. Sadly, it's the community of scrapbookers who are the losers."

"I’m am letting you know of these closures since they are similar to the woes expressed in your recent 'Benny Da Buyer' letter from an ex-Ben Franklin Retailer, also in Florida." – Veronica Hugger, National Scrapbooking Association

1. Highlights of the CHA 2005 Attitude & Usage Study are now available in the Members Only section of the CHA website. Visit www.craftandhobby.org. The study will be updated quarterly with the results posted on the site. Non-members wishing to purchase the complete Study should contact CHA's Loren Barrows, lbarrows@craftandhobby.org or 201-794-1133, ext. 204. The cost is $500.

2. The National NeedleArts Assn. study, The State of NeedleArts in the United States 2005, is available in the Trade section (members only) of the TNNA site, www.tnna.org.

3. The Craft Yarn Council of America's 2005 Tracking Study is available at www.craftyarncouncil.com/know.html. Updated every one or two years.

4. Scrapbook Retailing in America 2005, sponsored by Craftrends. A summary of the results was published in the November, 2005 issue and the complete study is available for $99. For info, email Bill Gardner at bgardner@primediasi.com.

5. 2005 Consumer Participation Survey, sponsored by Craftrends. Available in the December, 2005 issue of the magazine and online soon at www.craftrends.com. Published annually. Email Bill Gardner at bgardner@primediasi.com. Cost: $50.

6. The State of Beading: Consumer Purchasing Habits, Trends, and Motivation, sponsored by Interweave Press. Published in 2004. A four-page summary is available at www.beadexpo.com/press/IWPBeadingSummary.pdf. The complete survey is $200. Call 800-272-2193.

7. Scrapbooking in America, sponsored by Creating Keepsakes, published in June, 2004. To read a summary, visit www.creatingkeepsakes.com/service/press and click on "Scrapbooking in America Survey Highlights. To purchase the complete study ($250) online, visit www.creatingkeepsakes.com/shop/item.ihtml?prod_id=SIAS04. For more info, email dana.wilson@primedia.com. A new study is scheduled for next year.

8. The Home Sewing Assn.'s A Perspective on Retailers and Manufacturers/Suppliers and A Perspective on Consumers were published in 2005. An executive summary is available upon request from jperhac@sewing.org. Each version is $100 for members and $250 for non-members; to order, visit www.sewing.org/industry/industry.html.

9. Quilting in America 2003, sponsored by Quilter's Newsletter (published by Primedia) and Quilts Inc. Visit www.quilts.com/pressreleases/Quilting%20In%20America%20Survey.pdf . For more detailed reports, call Tina Battock at 303-273-1321. A new study is expected by year's end.

Others. A Sewing in America study, published by Sew News magazine, is scheduled for release early this summer ... Various consumer enthusiast magazines have surveyed their readers concerning their buying habits, brand preferences, etc., and often are willing to share the results with market researchers and potential advertisers. Check with the publishers or ad directors for individual magazines ... CNA is conducting research among readers to determine category trends, sales volume for independent retailers, and some comparisons of the same over the past three years. If you have received a form, please complete it as directed and return it in the postage-paid envelope. Results will be available later in the year.

1. Remember, we have not died and gone to heaven, so no study is perfect. And even if it was, it's a picture of the past, not the present. It takes months to conduct research, then tabulate and publish the results.

2. Every study has a different methodology, so comparing one study to another is truly an apples-to-oranges dilemma. Trying to take the CYCA yarn data and have it fit perfectly with the TNNA yarn research and the CHA study will just give you a headache. Each study is not a piece of a single jigsaw puzzle that, when fit together, forms a logical whole.

3. Was the study conducted for the first time or was it a repeat of an earlier study? If it's a first-timer, consider it a baseline. Any specific data might be a result of a flaw in the study rather than the "truth." But if a new study repeats the methodology, then the differences in the results are probably genuine trends.

4. Know a study's "margin of error." For example, if a study with a margin of error of 5 reports the percentage of households with a cross-stitcher is 20, then you can assume the true percentage is somewhere in the range of 15% and 25%. If an earlier version of the study revealed the percentage of households was 18% with the same margin of error, then you cannot conclude with 100% certainty that cross stitch has increased.

1. Question: Why isn't there more private label in our industry? Most large stores carry pretty much the same stuff, which means the primary way of trying to distinguish one store from another is price. Very few industry products have such a strong brand name, and there are vendors out there who'd be delighted to produce products with a store's label. So what's the holdup? If you have any thoughts, email them to me at mike@clnonline.com.

2. Sometimes a product line fails because it's way, way ahead of its time. About 20 years ago Plaid introduced a line of shoe paint for embellishing canvas tennis shoes. It's no longer around. Instead, Adidas has now introduced a limited-edition pair of all white leather sneakers complete with a "customization kit" of six acrylic paints, two brushes, and a palette. One other difference besides the 20 years: the Adidas shoes and kit cost $300.

STORES. The Ben Franklin Crafts store in Fergus Falls, MN has joined Sierra Pacific Crafts, a 60-store cooperative for independent retailers. The BF Crafts store is a 22-year-old family business, owned and operated by Eric and Jolene Larsen. Sierra Pacific Crafts began in the late 1970s as a small Northwest cooperative which has grown to include select retailers from around the U.S. SPC strives to maximize the success of its member stores and vendor partners through cooperative strategies in marketing, purchasing, education, operations, networking, and fellowship. For more about SPC, call Exec Director Heather Corvey at 503-981-6007, ext. 206, or email hcorvey@sierrapacificcrafts.org.

MONEY. Forbes magazine apparently likes to make lists of rich people. Last October the magazine compiled its annual list of the richest Americans. The list has included David Green of Hobby Lobby the last few years; now Forbes has compiled a world-wide billionaire list, and that, too, includes David. Forbes ranks him #382 with a net worth estimated at $2.0 billion; that's the same net worth Forbes estimated for David in the previous list.

STOCK. Syndicated Wall Street analyst Motley Fool recently recommend Jo-Ann's, pointing out that respected investment pros First Pacific Advisors and Olstein & Associates recently purchased a combined 20% of the company. "I think it's a great pick as a turnaround story.... It's a big if, but if management can turn things around and return the company to earning $40 million a year, there's a lot of room for price appreciation." (Comment: the same could be said for Hancock, too.)

EVENTS. As part of its National Craft Month celebration, Michaels will host a Make-it/Take-it Free Family Event at each of its 900 stores this Saturday from 10 am-3pm. At the event, kids can decorate their own 3-D Crayola Color Wonder Paint 'ems using Color Wonder paintbrush markers.

BEADS. The 14th annual Bead Expo will be in Charleston, SC May 17-21. More than 6,000 attendees are expected. Vendors are from India, China, Tibet, Japan, Australia, Europe, South America, and the U.S. and 85+ classes will be offered. Visit www.beadexpo.com, email info@beadexpo.com, or call 800-732-6881 ... Class registration for the Bead & Art Glass Fest in Orlando Nov. 10-12 opens today. Visit www.beadandartglassfest.com. It will be held in the same convention center and dates as the Memories Expo.

BOOKS. One of the most interesting "new" titles is Piper Publishing's The Workwoman's Guide, by "A Lady" offering sewing and needlework advice, tips, and techniques. It was originally published in 1838. Yes, 1838. To view sample pages visit www.piperpublishing.com and click on "Decorative Arts." ... For the latest from Jeanette Crews (cross stitch, knitting), visit www.jeanettecrews.com/results.cfm?Subcategory=164.

PR. Xyron's Design Runner is the subject of an incredible array of tv presentations in the near future – NBC, CBS, ABC, UPN WB, and Fox stations in Chicago, Baltimore, Tampa, Cleveland, Nashville, Philadelphia, Dallas, Sacramento, Phoenix, and San Francisco.

DOLLAR STORES. Dollar General opened its 8,000th store in Mission, TX ... Family Dollar opened its 6,000th store in Joliet, IL. A jury in Tuscaloosa found that Family Dollar should have classified a number of its store managers as hourly employees who would have been entitled to overtime pay. The court awarded damages of about $19.1 million, plus legal fees, the Associated Press reported. The company said it would appeal.

CREDIT CARDS. Scrapbookers can now obtain a "Loyalty" Visa card. It's a joint effort of Primedia, publisher of Creating Keepsakes, Simple Scrapbooks, and Paper Crafts, and National City Corp. CK's Lisa Bearnson is the spokesperson. Depending on the amount of purchases, card users can receive up to 4% back. Visit https://www.scrapbookrewards.com/pages.

DIVIDENDS. Michaels' board of directors declared a quarterly cash dividend of $0.10/ share to be payable Apr. 28 to shareholders of record at the close of business on April 14.

PEOPLE. Notions Marketing named Ray Shelgosh as Dir. of National Sales and New Business Development. Ray was a Sr. VP with Leisure Arts, and was president and owner of Designs for the Needle. Ray said, "Notions Marketing is the world’s leading distributor of craft-related componentry, staffed by some of the industry’s top talent. Being asked to join the Notions’ team was a privilege and a challenge. After all, they’re the very best at what they do. Complimenting an extremely effective management structure and creating additional momentum to help us move in profitable new directions is my top priority." ... ... RaNay Winter is the new East Coast sales rep for Today's Creative Home Arts magazine. RaNay had been a sales rep for Creating Keepsakes. Call her at 801-796-7037.

INTERNET. The National Scrapbooking Association and Library of Life.org has launched Celebration of Scrapbooking.com, "The first ever website for scrapbookers designed specifically to preserve and share their layouts and albums online forever and much more." The national launch is May 7, National Scrapbooking Day, but a preview is available at www.celebrationofscrapbooking.com.

BEADS. The fourth series of Beads Baubles and Jewels, hosted by Katina Forte and produced by KS, Inc. Productions, uplinks to PBS stations on May 10. The series is sponsored by Kalmbach Publishing, Bead & Button magazine, BeadStyle magazine, Fire Mountain Gems and Beads, Beadalon, Westrim Crafts, Blue Moon Beads, and Pure Allure. Series #300 won a Telly award for outstanding television production and was broadcast by 128 stations representing almost 62 million homes.

JAIL. Those of you who have attended industry trade shows in recent years may remember Roger Blackwell, a former Professor of Marketing at Ohio State U., who conducted various seminars on improving your business. Well, Mr. Blackwell was recently sentenced to six years in prison and fined $1 million for his part in an insider trading scheme concerning Worthington Foods, reported Columbus Business First.

DATA. To read some interesting research on the Gen X Mother and her use of cameras, visit http://pmai.org/complete_picture/cp_mag_momX.asp.

QUOTATION. "We act as though comfort and luxury were the chief requirements of life, when all that we need to make us really happy is something to be enthusiastic about." – Charles Kingsley

To read the latest listing of job searches conducted by the only personnel recruitment firm specializing in our industry, click on Jobs in the left-hand column or click HERE.

A. C. Moore (ACMR). Last*: 16.47 ... Change**: -1.07
Hancock Fabrics (HKF). Last*: 3.60 ... Change**: -0.27
Jo-Ann Stores (JAS). Last*: 12.50 ... Change**: -0.18
Michaels (MIK). Last*: 33.96 ... Change**: +0.97
Wal-Mart (WMT). Last*: 46.69 ... Change**: +1.35
CLN Retail Index. Last*: 162.46 ... Change**: +0.7%
Dow Jones Index. Last*: 11,279.65 ... Change**: +2.3%

A man and his wife were sitting in the living room and he said to her," Just so you know, I never want to live in a vegetative state, dependent on some machine and fluids from a bottle. If that ever happens, just pull the plug."

His wife got up, unplugged the TV, and threw out all of his beer.

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xxx

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